It is also introducing a programme to lower banks’ funding costs
The Reserve Bank has held the Official Cash Rate (OCR) at 0.25%, in line with economist expectations.
The Reserve Bank cut the OCR to 0.25% back in March, and committed to keeping it at that level for at least 12 months. The Monetary Policy Committee also agreed to offer additional stimulus to the economy through a Funding for Lending Programme (FLP), which will start in December and will reduce banks’ funding costs, as well as lowering interest rates.
There is also talk of a potential negative OCR next year, with the Reserve Bank stating that “progress has been made” on its ability to deploy a negative cash rate alongside the FLP.
“The Committee agreed that these instruments can be mutually supportive in bolstering economic activity if necessary,” the Reserve Bank stated.
Read more: Shorter-end mortgage rates expected to fall below 2% next year
“Economic activity since the August Monetary Policy Statement, both international and domestic, has proved more resilient than earlier assumed. However, the COVID-19 shock to the economy is very large and persistent.”
Nick Tuffley, chief economist at ASB said that the FLP scheme will drive down bank funding costs and impact already historically low interest rates, with the lowest home loan rate on the market currently sitting at 1.99%.
However, he says ASB has now changed its outlook and is no longer forecasting further OCR cuts next year – though this will depend on how effective the FLP scheme will be in lowering interest rates.
“The economy still needs stimulus, but the FLP may be enough,” Tuffley said. “Our previous forecast of a 75bp OCR cut in April to -0.5% looks too big and too soon.”
“News of late shows the NZ economy has held up surprisingly well in the near term,” he explained.
“The household sector, in particular, is on a tear. We still have question marks about how long this momentum can be sustained, and how much is a short-term sugar rush. However, it is clear that fiscal and monetary stimulus is already having a marked effect.”
Read more: Mortgage rates could drop further with negative OCR next year
Economist Cameron Bagrie believes the Reserve Bank has been putting its foot to the pedal when it comes to economic stimulus, and that a high demand for housing has given the economy a decent buffer.
“We have huge fiscal stimulus and lower and lower interest rates, and the Reserve Bank is signalling loud and clear that they want to deliver,” Bagrie said.
“We entered into a downturn with pent-up demand for housing, and that’s given us a buffer to work through these tougher times.
“It’s a lot easier to get a housing loan across New Zealand, but the real hits across other sectors will be 2020/2021 stories. We’re still in the early stages of feeling the aftereffects.”
