New Zealand’s’ central bank lowered its benchmark interest rate by a sharp 75 basis points to add further monetary stimulus in light of the negative impact on economic activity from the outbreak of the coronavirus, adding the rate “will remain at this level for at least the next 12 months.”
The Reserve Bank of New Zealand (RBNZ) cut its Official Cash Rate (OCR) rate to a new record low of 0.25 percent, its first rate cut since August 2019, and said large scale purchases of New Zealand bonds would be preferable to further rate cuts if further stimulus were to be required.
“The negative economic implications of the Covid-19 virus continue to rise warranting further monetary stimulus,” RBNZ said after an extraordinary meeting of its monetary policy committee.
To support the availability of credit, RBNZ also delayed the start of higher capital requirements for banks by one year to July 1, 2021, and would consider further delays if necessary.
It estimated this delay would enable banks to supply up to around $47 billion more in lending and the central bank is working on identifying other regulatory changes “to reduce the burden on financial institutions at this time of uncertainty.”
In February RBNZ left its rate steady, assuming the economic impact of the coronavirus, or Covid-19, would be of short duration but that it would have time to adjust its policy if the impact turned out to be larger and more persistent.
Since then, the outlook for the global economy has deteriorated significantly as global trade, trade, business and consumer spending has been curtailed significantly while governments are imposing a variety of restraints to mitigate the virus transmission.
“The negative impact on the New Zealand economy is, and will continue to be significant,” RBN said, adding demand for the country’s goods and services will be constrained, as will domestic production, while spending and investment will be subdued for an extended period.
On the other hand, RBNZ said the country’s financial system remains sound, with financial institutions well capitalized and the government is operating an expansionary fiscal policy and has imminent intentions for a fiscal package to provide both targeted and broad-based stimulus.
The New Zealand dollar has also depreciated, acting as a partial buffer for export earning.
In its discussions, the policy committee debated cutting OCR by 50 basis points, with the ability to follow up with more stimulus as needed at the regularly scheduled policy meeting later this month, or an immediate 75 point rate cut.
“Given views on the required level of stimulus given the economic impact of COVID-19, the Committee agreed a 0.75 percentage point reduction in the OCR would be a more suitable option,” RBNZ said.
The committee agreed the scheduled policy meeting on March 25 was no longer needed.
The Reserve Bank of New Zealand issued the following two statements:
“The Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months.
The negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus.
Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly. Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission.
Financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes.
The negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve.
Several factors will continue to assist and support economic activity in New Zealand.
New Zealand’s financial system remains sound and our major financial institutions are well capitalised and liquid. The Reserve Bank is also ensuring that the banking system continues to function normally.
The Government is operating an expansionary fiscal policy and has imminent intentions to increase its support with a fiscal package to provide both targeted and broad-based economic stimulus.
The New Zealand dollar exchange rate has also depreciated against our trading partners acting as a partial buffer for export earnings.
And, the Monetary Policy Committee agreed to provide further support with the OCR now at 0.25 percent. The Committee agreed unanimously to keep the OCR at this level for at least 12 months.
The Committee also agreed that should further stimulus be required, a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.
More information:
There will be no OCR Review on 25 March 2020
Record of Meeting
The revised OCR will be effective from 17 March 2020
A live-stream of a media conference, with Governor Adrian Orr, will be available on the RBNZ YouTube channel at 11am today.
Record of meeting – Extraordinary OCR Review – 15 March 2020
Members met for an extraordinary session of the Monetary Policy Committee on 15 March at 2.30pm. This meeting was called in response to the rapidly deteriorating economic situation relating to COVID-19.
Staff briefed the Committee on agreed Reserve Bank financial stability measures that were to be announced in co-ordination with any monetary policy decision. The Secretary to the Treasury outlined the broad scale of intended fiscal policy measures in light of the deteriorating economic outlook.
Staff presented indicative scenarios of the impact of COVID-19 developments on the economy. However, it was noted that there is extreme uncertainty around these estimates, and that risks had already shifted to the downside since the scenarios had been finalised.
It was agreed that, since meeting in February, the outlook for the economy had deteriorated significantly as a result of the impacts of COVID-19. The slowdown in the global economy would act as a serious headwind for the New Zealand economy. International and domestic initiatives to limit the spread of the virus would have a serious impact on travel and trade affecting both supply and demand channels in the economy. It was agreed that the Government and the Reserve Bank of New Zealand had a vital role to play in cushioning the economic impact through fiscal, monetary and financial stability measures. The members welcomed the Government fiscal response and the Reserve Bank’s financial stability measures.
The Committee discussed the effectiveness of a monetary policy response given the nature of the economic shock and agreed that a significant easing in monetary policy was required in order to achieve the goals of price stability and maximum sustainable employment. Such a response would also support co-ordinated financial stability measures, and the upcoming announcement of fiscal stimulus.
The members discussed the broad range of Official Cash Rate (OCR) settings that would be suitable. Staff briefed the Committee on the scale of policy stimulus required given deteriorating global conditions and the impact of travel restrictions. The Committee discussed the relative contributions of planned fiscal and financial stability measures in consideration of the monetary policy response. Staff also advised that an OCR of 0.25 percent was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.
Subsequent Committee discussion focused on two scenarios:
a 0.5 percentage point cut in the OCR to 0.5 percent, followed by an assessment of the rapidly developing COVID-19 situation, with the ability to follow up with more stimulus as needed at the scheduled March OCR review
A 0.75 percentage point reduction in the OCR to 0.25 percent.
Members noted that lower interest rates would likely support the soundness of the financial system – in the context of the Committee’s Remit.
Given views on the required level of stimulus given the economic impact of COVID-19, the committee agreed a 0.75 percentage point reduction in the OCR would be a more suitable option.
The Committee then discussed supporting this significant monetary stimulus with forward guidance. Members agreed to provide forward guidance that the OCR would stay at the level of 0.25 percent for at least 12 months. This guidance would also provide clarity to financial market participants that a negative OCR would not be implemented over this period.
The Committee was also briefed by staff on additional monetary tools, and which were likely best suited to providing additional stimulus, noting that the recently published principles recognise the best tool depends on the particular circumstances. Assuming markets are functioning effectively, staff indicated Large Scale Asset Purchases of New Zealand Government bonds were the next best monetary tool available to the Committee. The Committee agreed with this assessment. However, the Committee agreed that additional tools were not needed at this point.
The Committee reached a consensus to:
Cut the Official Cash Rate to 0.25 percent.
Provide forward guidance that the OCR would remain at 0.25 percent for at least 12 months.
Agree that Large Scale Asset Purchases of New Zealand government bonds would be the best additional tool to provide further monetary stimulus in the current situation – if needed.
The committee agreed that the scheduled meeting of the Committee on 25th of March was no longer required.
Attendees:
Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha
External: Bob Buckle, Peter Harris, Caroline Saunders
Observer: Caralee McLiesh
Secretary: Adam Richardson”
Financial system sound, and Reserve Bank providing additional support
“New Zealand’s financial system is sound, with strong capital and liquidity buffers, but faces significant uncertainties from the impacts of COVID-19. The Reserve Bank is announcing additional measures to support the provision of credit and market functioning.
Reserve Bank Deputy Governor Geoff Bascand says the situation around COVID-19 is evolving rapidly, and there is much uncertainty.
“To support credit availability, the Bank has decided to delay the start date of increased capital requirements for banks by 12 months – to 1 July 2021. Should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary.”
“We are taking this action now to help support lending in the economy at time when there is a lot of uncertainty. The Reserve Bank’s expectation is that banks will utilise this flexibility to maintain lending to households and businesses. Banks have significant buffers above current regulatory minimums, and we encourage them to use them,” Mr Bascand said.
“Deferring the capital framework implementation provides banks with significant capital headroom. We estimate that this headroom will enable banks to supply up to around $47 billion more lending than would have been the case, had the decisions been implemented as planned.”
Mr Bascand said the Reserve Bank is currently identifying other regulatory initiatives that can be deferred, to reduce the burden on financial institutions at this time of uncertainty. These will be announced in coming days. The Reserve Bank is working closely with the Council of Financial Regulators and international regulators.
Assistant Governor Christian Hawkesby said the Bank is also ensuring there is sufficient liquidity in the financial system, through regular market operations.
“The Bank has a number of operational tools at its disposal to support liquidity and market functioning in New Zealand. This has helped the domestic cash market and foreign exchange swap market to continue to function effectively over recent weeks,” Mr Hawkesby says.
“Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets. We will continue to monitor developments closely and engage regularly with market participants to ensure we are ready to provide support if needed.”
The Reserve Bank also announced the following changes to the pricing of its standing facilities and ESAS accounts, in part to assist cash market functioning at a lower OCR:
Cash that ESAS account holders have on deposit at the Reserve Bank that is in excess of their allocated ESAS credit tier will be remunerated at the OCR less 25 basis points (from OCR less 75 basis points).
Bonds lent through the Bond Lending Facility well be lent at the OCR less 50 basis points (from OCR less 75 basis points).
A maximum rate will be set for bonds lent through the Repo Facility at the OCR less 50 basis points (from OCR less 75 basis points).
Cash will continue to be lent via the Overnight Reverse Repo Facility at the OCR plus 25 basis points until further notice.
The Reserve Bank has a number of tools to provide additional liquidity, and support to market functioning, should these be required in the future:
The ability to provide term funding through a Term Auction Facility (TAF) which can provide collateralised loans out to 12 months. This facility was previously provided from 2008 to 2010.
The Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
The ability to provide liquidity to the NZ government bond market to support market functioning.
Mr Hawkesby says the Reserve Bank continues to monitor developments, and is ready to act to ensure markets and the financial system operate in a stable and efficient manner.”
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