As widely anticipated, RBNZ left the OCR unchanged at 0.25% today. The cap of Large Scale Asset Purchase (LSAP) program, a.k.a. QE, also stays at NZD 100B. Meanwhile, the central bank reiterated the forward guidance that the OCR will be “held at 0.25% in accordance with the guidance issued on March 16”. The overall tone in the meeting is tilted to the dovish side. While acknowledging “the progress being made on the Bank’s ability to deploy additional monetary instruments”, RBNZ is “prepared to provide additional stimulus”. More views about Funding for Lending Program (FLP) were disclosed and the members intend to “launch an FLP before the end of 2020”. It is likely that RBNZ would introduce such a program in November.

RBNZ remained concerned about the economic outlook, although “the size of the contraction had been smaller than earlier expectations”. As suggested in the statement, “the level of economic activity remains significantly below that experienced prior to the COVID-19 economic disruption”, while lockdown measures in Auckland have “continued to dampen economic activity, and business and consumer confidence”. Moreover, “international border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions”. RBNZ also warned of the potential drag on the recovery as “the removal of temporary support policies has commenced” including the roll-off of the Wage Subsidy scheme.

The central bank acknowledged the strength of the housing market. As noted in the minutes, “house prices had risen over recent months, in contrast to the Reserve Bank’s baseline scenario which had assumed a decline. Some members noted that economic activity in New Zealand has historically been closely correlated with changes in household wealth, and that a stronger housing market may indicate a stronger recovery in consumer spending and residential construction if sustained. However, other members noted that low population growth and rising unemployment are expected to constrain further house price increases”.

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On the monetary policy outlook, RBNZ disclosed more about Funding for Lending Program (FLP). As suggested in the accompanying statement, the members “agreed that the alternative instruments can be deployed independently, and noted that the FLP would be ready before the end of this calendar year”. The minutes also revealed the members’ judgment that “deploying an FLP before the forward guidance period for holding the OCR ends could provide additional stimulus to the economy sooner” and that they “preferred to launch an FLP before the end of 2020”. It is likely that RBNZ would introduce such a program in November.

Regarding the policy rate, policymakers “agreed with the previous assessment that a lower OCR would be complementary to its other monetary policy tools, and that it was prepared to lower the OCR to provide additional stimulus if required”. They also indicated that “the banking system is on track to be operationally prepared for negative interest rates by year end”. The central bank reiterated that negative interest rates are an option to further easing. However, the language of “if required” signaled that such action is not urgent. The cap of LSAP stays at NZD 100B. RBNZ affirmed the market that it will “continue front-loading purchases under the LSAP program, while maintaining flexibility to adjust purchases as market conditions dictate”.

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