Our take on the latest Monetary policy review (Wed 23 Sept 2020)
Funding for Lending Programme strongly signalled
Large Scale Asset Purchase Programme to continue
OCR held steady at 0.25%
The key numbers...
- The Reserve Bank pointed towards the need for additional stimulatory measures in future to help reach its inflation and employment mandates. The Bank remains concerned that economic activity is still well below pre-pandemic levels and the support provided by the Wage Subsidy scheme is winding down.
- Further monetary stimulus will require additional unconventional monetary policy instruments, including the implementation of a Funding for Lending Programme (FLP), a negative Official Cash Rate (OCR), and/or the purchase of foreign assets.
- The Large Scale Asset Purchase (LSAP) Programme remains with a limit of $100b until June 2022, but we note that the Bank has lifted its rate of weekly purchases by 44% to $1.4b as it attempts to provide more monetary stimulus to the economy.
- The Reserve Bank has kept the Official Cash Rate at 0.25% and intends to do so until its period of forward guidance ends in March 2021.
LSAP programme purchasing profile
Weekly purchases, $m
...and our reaction
- The FLP would provide term lending to retail banks at near OCR rates, providing quick and cheap lines of credit, helping to lower the funding costs of financial intermediaries, and therefore lowering retail interest rates.
- The Bank is aiming to have the FLP ready before the end of this year. The Bank noted that the tool can be used independently of a negative OCR, leading us to believe that the FLP will be introduced in November’s Monetary Policy Statement.
- Additional unconventional monetary policy tools include a negative OCR and the purchase of foreign assets. A negative OCR would look to pull on the same levers as conventional monetary policy, whereas the purchase of foreign assets would aim to boost the economy by freeing up currency and lowering the exchange rate, boosting exports.
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