Our take on the latest Monetary policy review (Mon 16 Mar 2020)
OCR slashed to 0.25%
RBNZ confirms OCR for 12 months
Large scale asset purchase programme the next step
The key numbers...
- In an emergency decision, the Reserve Bank has slashed the official cash rate (OCR) to 0.25%, a 75-basis point (bp) – the fourth-largest cut in the OCR’s history.
- The Reserve Bank has also, for the first time, provided specific forward guidance on the OCR track, announcing that the “[Monetary Policy] Committee agreed unanimously to keep the OCR at this level for at least 12 months.”
- Surprisingly, the Reserve Bank ruled out any further OCR cuts, instead announcing that if “further stimulus be required, a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.”
- The Reserve Bank has reinforced just how concrete its forward guidance is by stating that its next steps of asset purchases explicitly rule out a zero OCR – it “provide[s] clarity to financial market participants that a negative OCR would not be implemented over this [12-month] period.”
- Increased bank capital holding requirements have been deferred for a year which, by the Bank’s estimate, will free up $47b of additional lending.
- There will no longer be an OCR Review on 25 March.
OCR slashed to 0.25%
OCR track
...and our reaction
- The Reserve Bank has finally acted on the COVID-19 pandemic, cutting interest rates, providing lending certainty for the next year, and freeing up banks’ ability to lend through the crisis.
- The Bank’s hand was essentially forced by the government’s unexpectedly strict move over the weekend to force virtually all foreign arrivals to self-isolate for 14 days, which will stop virtually all tourism activity.
- The move comes later than other central banks around the world, but helps provide more certainty to businesses, banks, and markets – alongside ensuring monetary policy moves in lockstep with fiscal policy.
- Retail banks are the key focus for today’s announcements by the Reserve Bank, as the changes announced will ensure banks retain an ability to lend at scale as the crisis deepens. Retail banks are expected to pass through the entire 0.75% cut, with Westpac already confirming this decision.
- The Reserve Bank has painted itself into a corner by issuing strong forward guidance and mapping out the next moves, should they be required. In explicitly ruling out a negative interest rate, uncertainty over how these unusually monetary settings would operate has been removed.
- Instead, the OCR now becomes essentially irrelevant for the next 12 months, with asset purchases the next cab off the rank when (not if) additional stimulus is required.
- We are of the view that, despite the Reserve Bank’s position that the OCR will stay unchanged for 12 months, emerging pandemic developments may well force the bank to cut again.
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