RBNZ leaves OCR unchanged at 0.25 percent; pledges to continue with LSAP program up to NZD100 billion

The Reserve Bank of New Zealand (RBNZ) decided to leave its official cash rate (OCR) unchanged at 0.25 percent at its September meeting, as widely expected. In addition, its Monetary Policy Committee (MPC) agreed to continue with the Large Scale Asset Purchase (LSAP) Programme up to NZD100 billion, arguing that “this action is necessary to further lower household and business borrowing rates in order to achieve the Committee’s inflation and employment remit”.

In its policy statement, the New Zealand’s central bank said:

• Committee noted progress being made on Bank’s ability to deploy additional monetary instruments, including Funding for Lending Programme (FLP), negative OCR and purchases of foreign assets;
• Members also agreed that alternative instruments can be deployed independently; noted that FLP would be ready before the end of this calendar year (details on design of the programme would be agreed and published ahead of deployment);
• Economic information available since August has confirmed that level of economic activity remains significantly below that experienced prior to COVID-19 economic disruption; ongoing virus-led activity restrictions had also continued to dampen economic activity, and business and consumer confidence;
• Members agreed that balance of risks to global economic outlook remained to downside;
• Any significant change in economic outlook remain dependent on containment of virus, which is highly uncertain;
• Commodity prices for New Zealand’s exports remain robust, but this has been partly offset by NZD exchange rate moderating the return to local export producers;
• Members agreed that outlook for inflation and employment remained subdued;
• A rise in unemployment and an increase in firm closures are expected, as resource reallocation continues;
• Members agreed that monetary policy will need to provide significant economic support for a long time to come to meet inflation and employment remit, and promote financial stability; agreed they are prepared to provide additional stimulus;
• Committee noted that banking system is on track to be operationally prepared for negative interest rates by year end;
• Committee agreed that severe and prolonged economic downturn would make it difficult to achieve its inflation and employment objectives, and at the same time would pose material risk to financial stability.