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Our Take - RBNZ well Orr-ganised in ‘active preparation’.

Fuseworks Media
Fuseworks Media

It’s all about the preparedness to package alternative tools. The RBNZ left the OCR unchanged at 25bps. And the LSAP programme was extended to $100b, as we expected. But what could the RBNZ do next?

Lowering interest rates to the lowest possible levels may involve a NEGATIVE OCR, and term funding to banks. The ‘package’ would squash retail rates closer to zero (but not below zero).

The preparedness of the RBNZ suggests the combination of a negative OCR and term lending could come as early as November (if the lockdown extents).

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The RBNZ kept the cash rate at 0.25%, as everyone expected. The RBNZ also expanded the LSAP program to $100bn, as we expected. The extension of the LSAP program to June 2021 (an extra 13 months) was a little more than market expectations of $80-90bn, but the natural next step in our view. In order to avoid any awkward limits, the RBNZ now has the remit to buy 60% of total outstanding Government bonds. The changes allow for the 100b size and front loading of purchases (without expanding the pool of assets to buy). The assertive changes were designed to keep the pedal to the metal, and flatten market interest rates.

The Kiwi Government bond curve has been steam-rolled by the announcement. Job done, again. Before the global pandemic, the NZGB curve was 60% owned by foreigners. It seems we’re wary of our borders again, with 60% of NZGBs potentially being bought by the RBNZ over coming years. Local fund managers, insurance firms, and investors will have to pay up to beat foreigners for the remaining 40%. It’s safe to say the interest paid by the Government on debt issuance will remain very low indeed.

Beyond the inevitable LSAP extension, the focus turned to the RBNZ’s positioning on "other" alternative measures. We have long argued that the next best option is a Bank Term Lending (funding for lending) programme. A term lending facility would be a sure-fire way to reduce all retail rates (deposit and lending). " A term lending programme would lower bank funding costs, both directly and indirectly, by reducing banks’ demand for, and hence the price of, other sources of funding. This would in turn help to lower the cost of loans for households and businesses. Internationally, term lending programmes have also sought to directly encourage the supply of credit via including incentives for banks utilising the programme to expand their lending, providing additional stimulus to the economy." (RBNZ Aug MPS)

We were surprised, however, to see the idea of a "package" deal with a negative OCR. "Combining a negative interest rate with lower lending rates to banks… to lower all retail rates" Christian Hawkesby. The MPS positioned a negative OCR alongside term lending to banks as a package to fight downside risks. At face value, a negative OCR (say -25bps or -50bps) could see a term (wholesale) funding rate for banks below 0% from the RBNZ. In such a world, retail rates would NOT fall negative, but closer to 0%. We could conceivably see retail deposit rates well below 1% (and closer to 0%), and mortgage rates closer to 1%.

In the process to smashing interest rates expectations to, and now through, 0%, the Kiwi currency took a welcome hit. But the Kiwi dollar is still too strong. Commodity prices for Kiwi exports remain strong, but our exporters are reaping little benefit. Because of the recent uptrend in the Kiwi dollar. A lower exchange rate should help our exporters take advantage of the higher prices. Pumping the FX market with more, freshly printed Kiwi currency is one way to place downward pressure on the exchange rate. Easier said than done. It’s not hard to understand why the NZD is performing the way that has been. Coupled with general US dollar weakness, NZ’s Covid-19 situation is envied by many. And if global investors are piling into Kiwi dollars, because the rest of the world looks a lot worse, it’s difficult to stop. But if conditions deteriorate further and the level of the exchange rate becomes unjustified, the option of purchasing foreign assets may become a serious one. But we’re not there yet. It is an option.

Fiscal policy will continue to play an important role in supporting NZ’s economic recovery. Next Thursday the Government’s books will be opened ahead of the general election. The Government had set aside around $14bn from the Covid-19 recovery fund to tackle further Covid outbreaks. Like the one we are facing now. This morning the Minister of Finance, Grant Robertson, signalled that the Government is open to a regional wage subsidy for Auckland should the region go into an extended lockdown. The PREFU will take on a little more importance as a result.

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