Reserve Bank keeps OCR on hold, unveils new funding plan

The Reserve Bank has left its official cash rate unchanged at 0.25 per cent, 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 bond buying cap at $100 billion.

A FLP would effectively offer commercial banks a discounted retail rate which would lower their funding costs and enable them to cut mortgage rates further.

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

On March 16, amid the depths of concern about the worldwide spread of Covid-19, 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 today’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 Covid-19 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 will continue to curtail international trade and migration, with variable impacts 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 pass-through to lending rates closely.

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

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