Our take on the latest Monetary policy review (Wed 24 Jun 2020)
OCR and Large Scale Asset Purchases unchanged
Increased LSAP possible in coming months
Door to negative OCR left wide open
The key numbers...
- At today’s review the Reserve Bank left both the official cash rate (OCR) and Large Scale Asset Purchases (LSAP) programme unchanged, at 0.25% and $60b respectively.
- The Bank is open to “potentially expanding the LSAP programme [if required, and] the Committee continues to prepare for the use of additional monetary policy tools as needed.”
- Larger fiscal stimulus from the government and a faster return towards normalcy in New Zealand were noted by the Bank. However, these factors were balanced against the persisting global disruption and downturn, with the Bank noting that the “balance of economic risks remains to the downside”.
- In its meeting record, the Committee noted that due “to worldwide uncertainty about the pandemic containment, the possible negative outcomes remain severe and larger than any near-term upside surprises.”
LSAP programme purchasing profile
Weekly purchases, $m
...and our reaction
- Significantly, the Reserve Bank noted that “it is not yet clear whether the monetary stimulus delivered to date is sufficient to meet its mandate”, a clear indication that the Reserve Bank is still considering expanding its LSAP programme.
- Any moves to expand the LSAP would be more than tinkering, with the Bank noting that a “change in the size of the programme would also need to be of sufficient magnitude to make a meaningful difference”, meaning another sizable increase, in the order of $30b, could occur.
- The Reserve Bank has been at pains to balance near-term optimism with a realistic view of the economic outlook. Any perception of a rosier outlook would have risked a further appreciation in the exchange rate.
- The Bank has also left the door wide open to additional monetary policy support, including the note that work continues on the ability to use “additional monetary policy tools as needed” – which seems to be intended as highlighting that a negative OCR could still be on the table once it is technically feasible.
- We expect the Reserve Bank to hold the OCR at 0.25% until at least the start of 2021, fulfilling its forward guidance and waiting for retail bank systems to b able to cope with a negative interest rate. However, we see scope for an expansion of the LSAP programme as early as August if the Reserve Bank isn’t convinced it has yet done enough.
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