Our take on the latest Monetary policy review (Wed 12 Aug 2020)
Large Scale Asset Purchase limit increased to $100b by June 2022
Further stimulus packages remain on the cards
Negative official cash rate increasingly likely in future
The key numbers...
- The Reserve Bank has increased the size and length of the Large Scale Asset Purchase (LSAP) programme. Previously a $60b programme over one year, the LSAP limit has been increased to $100b by June 2022.
- The Reserve Bank has looked through the recent run of stronger domestic economic activity and focused on the heightened global economic risk posed by the rise in COVID-19 cases, alongside the concerns and uncertainty of New Zealand’s economic future as support is removed.
- The Bank highlighted that it has additional stimulus tools, including a lower official cash rate (OCR), a Funding for Lending Programme, foreign asset purchases, or interest rate swaps, up its sleeve and is willing to use them as required, such as if New Zealand enters into lockdown again to prevent a second wave.
- The Bank noted that, if needed, its preference was for a lower or negative OCR or a Funding for Lending Programme (a direct funding of banks). The Bank decided to hold the OCR steady at 0.25%, in keeping with forward guidance from March, although the Bank reaffirmed the possibility of entering into negative rate territory in the future to assist the LSAP programme.
LSAP programme purchasing profile
Weekly purchases, $m
...and our reaction
- The extension to the LSAP helps provide banks with more certainty that financial market support will remain for an extended period, which will provide more confidence to push interest rates lower.
- As government bond issuance rises, the Bank acknowledged that there is now a larger market of sovereign debt, but more importantly, that the Reserve Bank feels it is able to purchase a larger share of the market without disrupting market functions.
- Reserve Bank forecasts are more optimistic than previously, with the hit to GDP expected to be smaller than in their May Statement. However, the Bank acknowledges that although the domestic economy initially recovered faster and stronger than expected, the increasingly gloomy global picture will remain a strong handbrake on the New Zealand economy.
- Community transmission of COVID-19 in New Zealand remains a heavy question mark over the economy. How quickly a second wave can be stamped out, and what preventative measures are required, will in part determine how the economic outlook, and future monetary policy settings, evolve.
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