New Zealand’s Central Bank may unveil more monetary stimulus
Customers queue outside a supermarket in Auckland, New Zealand. Associated Press
Meanwhile, New Zealand Prime Minister Jacinda Ardern extended a lockdown in the country’s biggest city on Friday in response to the first national coronavirus outbreak in months, sticking with a “go early, go hard” approach she said has proven effective.
Ardern said genomic testing has shown the latest outbreak is a different strain to the original outbreak in New Zealand earlier in the year, suggesting it was new to the country.
The New Zealand leader said lockdown measures in Auckland, home to about 1.7 million people, and social distancing measures across the country that were imposed on Wednesday would remain in place for another 12 days.
Reserve Bank of New Zealand (RBNZ) Deputy Governor Geoff Bascand told Reuters the resurgence of the COVID-19 pandemic posed a big risk to its outlook as its baseline scenario has an assumption that the virus is contained in the country.
“This is a major risk to our outlook,” Bascand told Reuters in an interview.
“If we get periods of resurgence and have longer lockdown periods then the unfortunate consequence of that is we will see downside risks to our outlook; things will be worse. We would have to consider doing more in terms of our monetary stimulus,” Geoff Bascand said.
RBNZ expanded its quantitative easing programme on Wednesday and warned that policy rates might have to go below zero.
Bascand said if the bank has to add further stimulus beyond what was announced on Wednesday, it would go for a combination of negative interest rates and a “funding for lending” programme that lowers financing costs.
The programme will complement negative interest rates, he said, as it would reduce rates at which banks can borrow from the RBNZ and therefore allow them to pass on the rates more effectively.
“If we just do negative interest rates, there is some risk that banks tighten lending as it hurts their profitability a bit,” Bascand said.
The RBNZ stunned markets with a 75-basis-point cut in March as the coronavirus surfaced in the country, but has since left it unchanged.
Recent data indicates the economic impact of the pandemic was not as dire as first feared, due to early action that contained the spread of COVID-19. Still, that was not enough to prevent the economy’s worst slump in nearly three decades in the first quarter.
Bascand said while New Zealand is doing better domestically, the world has a difficult road back to recovery, which will impact the Pacific nation’s recovery prospects.
“This is a big economic shock and its not over. It was a little bit of wonderful feeling when we had 100 days of containment, but its a long haul to recovery,” he said.
The central bank surprised markets on Wednesday by expanding its bond-buying programme and warned that policy rates might have to go below zero to revive the coronavirus-battered economy as the country was plunged back into lockdown.
The Reserve Bank of New Zealand expanded its large scale asset purchase (LSAP) programme to as much as NZ$100 billion ($65.39 billion), from NZ$60 billion previously, and extended the deadline for purchases out to mid-2022. It left interest rates at an all-time low of 0.25%, as widely expected. Underlining policymakers’ readiness to step-up support, the RBNZ said it is also actively considering a package of additional monetary tools, including negative interest rates and low-cost funding to banks. The purchase of foreign assets also remain an option.
“The bank sent its clearest message yet that negative rates are coming,” said Ben Udy of Capital Economics.
“We still expect the Bank to wait until next year before bringing the OCR into negative territory, though the risk now is that the Bank moves sooner rather than later.”
In response to the central bank’s statement, the New Zealand dollar slipped 0.5% to $0.6540.
The central bank’s dovish tone comes as New Zealand re-introduced mobility restrictions earlier in the day due to the emergence of a coronavirus cluster after sailing through for more than 100 days without COVID-19 cases at home.
The discovery of four infected family members in Auckland led Prime Minister Jacinda Ardern to swiftly reimpose tight restrictions on movement in New Zealand’s biggest city and travel limitations across the entire country.
Reuters
