New Zealand Central Bank Holds Rate; Signals Further Easing

newzealandcentralbank sept25 22sep20 lt

New Zealand central bank central bank left its key rate and asset purchase programme unchanged on Wednesday but agreed to provide additional stimulus as the outbreak of the coronavirus in August has dented confidence among firms and households.

The Monetary Policy Committee of the Reserve Bank of New Zealand decided to hold its key Official Cash Rate at 0.25 percent and to continue with the Large Scale Asset Purchase Programme up to NZ$100 billion.

Policymakers assessed that further monetary stimulus would be needed going forward. They affirmed that the Funding for Lending Programme, or FLP, a negative OCR, and purchases of foreign assets remain under consideration.

The Committee agreed that these instruments can be mutually supportive in bolstering economic activity. Members said that the alternative instruments can be deployed independently, and noted that the FLP would be ready before the end of this calendar year.

Further, members viewed that deploying an FLP before the forward guidance period for holding the OCR ends could provide additional stimulus to the economy sooner.

The bank is expected to cut the OCR into negative territory early next year, Ben Udy, an economist at Capital Economics, said.

But the economist observed that given that the market has almost fully priced on expectation of a further 50 basis points of easing, negative rates are unlikely to drive much of a weakening in the New Zealand dollar.

Although the outbreak of Covid-19 in New Zealand appeared to be contained, the coronavirus pandemic and associated travel restrictions could have a significant long-term negative impact on the economy.

House prices had advanced recently but some policymakers noted that low population growth and rising unemployment are expected to constrain further house price increases.

The committee said the monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability.

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