RBNZ outlines plans for new tool to push rates lower
AUCKLAND: A powerful new tool which will inject billions more dollars into our financial system and push interest rates lower could be ready to deploy as soon as November, Reserve Bank economists say.
Funding for lending (FLP) is a mechanism for the RBNZ to lend some of its freshly printed cash directly to commercial banks at special rates — as opposed to just providing a wholesale lending facility (which it does with its official cash rate).
FLP would effectively offer commercial banks a discounted retail rate, which would lower their funding costs and enable them to cut mortgage rates further.
It would likely be bad news for those with bank savings as it would reduce bank reliance on deposits for their funding.
That would push term deposit rates lower.
In a briefing yesterday RBNZ assistant governor Christian Hawkesby and chief economist Yuong Ha outlined how FLP might work — although they stopped short of confirming final details of design and timing.
Work was well advanced and it was likely FLP would be ready to deploy in time for the Monetary Policy Statement on November 11 — should the policy committee choose to do so.
Asked about the
potential scale of the lending programme, Mr Hawkesby said that was still being worked through as part of the design process.
But he suggested looking to the relative scale of FLP deployed by other central banks, for comparison.
The Reserve Bank of Australia has introduced $A90 billion ($NZ97.8 billion) of FLP, for example.
The FLP would be in addition to $100 billion of quantitative easing (QE) cash which has already been allocated by the Reserve Bank to buy New Zealand government bonds.
But it would sit with the QE on the Reserve Bank’s balance sheet as an asset to be repaid at some point.
Both Mr Ha and Mr Hawkesby acknowledged concerns about lower interest rates pushing up asset prices — specifically house prices.
It was an issue that was given serious consideration by the RBNZ, Mr Ha said.
But the RBNZ remained focused on a ‘‘least regrets’’ approach to monetary policy, he said.
‘‘We’d rather be [in] a situation where we have done too much too soon, than one where we’ve done too little too late.’’
That was based on the view that risks to the economy were on the down side at present.
Experience suggested it was harder to raise inflation if the economy slowed too much than it was to cool things down if the economy overheated.
It was likely FLP would put downward pressure on deposit rates for savers, they said.
Asked about the risk this could discourage saving by New Zealanders, Mr Ha and Mr Hawkesby emphasised the goal was shortterm support for the economy through the downturn so it could recover and get back to something more normal.
‘‘That’s the state of the world today,’’ Mr Hawkesby said.
‘‘Fundamentally, we still believe that interest rates are effective [at] providing economic stimulus,’’ he said.
‘‘For those with existing debts we know lower interest rates will free up cash flow.’’
In a research note ANZ chief economist Sharon Zollner has highlighted the impact of FLP on deposits.
‘‘With the RBNZ providing this money, banks would not need to source as much funding from other, more expensive sources, and bank funding costs would be lower,’’ she said.
‘‘This would mean passthrough to lending rates would be greater and banks would not have to compete so aggressively to source deposits. Deposit rates would fall further than without the scheme.’’
Fundingcost effects would be particularly potent if there was significant takeup of the scheme, although there could be downwards pressure on deposit rates even if takeup was not large, since banks would know they had the option of taking up the funding if deposit growth slowed, she said. — The New Zealand Herald