OCR to stay put at 0.25% as expected

WELLINGTON: The Reserve Bank has left its official cash rate unchanged at 0.25%, in line with market expectations.

The bank also said it would roll out a funding for lending programme (FLP), aimed at lowering interest costs by offering cheap funding to banks, in December.

The Reserve Bank also left its government bondbuying cap at $100 billion.

The New Zealand dollar firmed a little to US68.40c from US68.33c just before the 2pm release yesterday.

On March 16, amid the depths of concern about the worldwide spread of Covid19, the central bank cut the OCR by 75 basis points to its current level and said it would remain at that level ‘‘for at least the next 12 months’’.

In yesterday’s statement, the Reserve Bank said economic activity since the August monetary policy statement, both international and domestic, had proved more resilient than earlier assumed.

In New Zealand, this trend was evident across a range of indicators, including employment, household spending, GDP and asset prices.

These outcomes reflected the effectiveness of the health and economic policy responses to the initial shock, it said.

‘‘However, the Covid19 shock to the economy is very large and persistent, and inflation and employment will remain below the remit targets for a prolonged period.

‘‘These outcomes are despite the current significant fiscal and monetary stimulus,’’ it said.

The outlook for global economic activity remained dependent on the containment of the virus.

‘‘While recent news on vaccine developments is positive, there remains a long and uncertain lag before any widespread vaccine deployment may be achieved,’’ the Reserve Bank said.

The bank said international border restrictions would continue to curtail international trade and migration, with variable effects across industries and regions.

International prices for New Zealand’s exports have remained resilient, although export returns continue to be partly offset by the New Zealand dollar exchange rate.

Members of the bank’s monetary policy committee, in notes released with the Reserve Bank’s statement, said the effectiveness of an FLP would depend on financial institutions passing on declines in their funding costs to borrowers, and agreed to monitor the passthrough to lending rates closely.

The committee said similar programmes deployed overseas had shown they were effective.

On the basis of yesterday’s statement, ASB said it now expected the OCR would remain on hold at 0.25% ‘‘although the balance of risks will remain skewed towards the need for further support’’.

ASB chief economist Nick Tuffley said the FLP scheme could add enough stimulus to ensure the New Zealand economic recovery remained sufficiently on track.

‘‘Our assessment of how the economy is tracking suggests the FLP scheme could be enough stimulus to ensure the New Zealand economic recovery remains sufficiently on track,’’ Tuffley said.

However, Capital Economics, which predicted in March rates would go negative, said it still expected the rate to go to minus 0.25% at the bank’s April meeting.

‘‘Admittedly, if a vaccine becomes available and is distributed early next year it is possible that the bank decides not to cut rates into negative territory,’’ Capital Economics said.

‘‘On balance, though, we think the economic scarring from the pandemic should be enough for the bank to cut next year even if a vaccine has started rolling out.’’ — The New Zealand Herald

❛ . . . the Covid19 shock to the economy is very large and

persistent . . .