Our take on the latest Monetary policy review (Wed 11 Nov 2020)
Funding for Lending Programme implemented next month
No targeting in the FLP, but LVRs might be back in March 2021
RBNZ open to OCR cut, but no signal yet
The key numbers...
- The Reserve Bank confirmed that it will implement a Funding for Lending Programme (FLP) in early December to “reduce banks’ funding costs and lower interest rates.”
- Details of the scheme will be unveiled over the next few weeks – but, the Committee noted that “targeting credit to specific sectors was the role of the banking sector or government initiatives.”
- Recent upbeat economic data was highlighted, and the Bank claimed “risks to the baseline scenario were less skewed to the downside than they had appeared earlier in the year”, but “the COVID-19 shock to the economy is very large and persistent.”
- The Bank’s forecast is now for a considerably lower peak in unemployment of 6.4% in mid-2021, but the Bank also expects a double-dip recession, with negative GDP growth in the Dec-20 and Mar-21 quarters.
- The Bank remains open to further cuts to the OCR “if necessary”, with the Committee “prepared to lower the OCR to provide additional stimulus if required”.
RBNZ picking a less drastic hit to employment
Unemployment rate, seasonally adjusted
...and our reaction
- The introduction of a FLP in December will drag borrowing costs for banks lower with the expectation that these savings are passed through to lower retail rates, likely adding more fuel to the fire in the housing market.
- The Bank’s reluctance to target the FLP makes sense as previous attempts to target policy through the Business Finance Guarantee Scheme were seen as too hard to work with, limiting the scheme’s effectiveness.
- The Bank announced earlier today that it would consult on reinstating Loan-to-Value Ratio (LVR) restrictions in March 2021 – two months’ ahead of expectations – likely in response to expected criticism over further upwards pressure on asset prices.
- The Reserve Bank has a tough road ahead – monetary policy actions to boost inflation and employment will further inflate roaring asset prices in the short-term. However, the Bank continues to see the potential stimulatory wealth effect of higher asset prices and its ability to boost consumer spending as able to support economic activity.
- There is still scope for a negative OCR next year, but the Bank will wait and see how the FLP changes lending activity first before deciding if a move in the OCR is warranted. If a negative OCR is required, it could be implemented ahead of expectations, with the Reserve Bank seemingly open to considering breaking its forward guidance if conditions warrant – as seen by its announcement on the LVRs.
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