Nine months after COVID-19 first caused the global economy to go into crisis, its economic effects in New Zealand have proven persistent, with both inflation and employment expected to remain below the remit targets. The Reserve Bank of New Zealand’s monetary policy statement for November indicates that despite this, the country has proven more resilient than expected. 

Going forward, it stresses that the outlook for global economic activity remains dependent on the containment of the virus. Current progress on the development of multiple vaccines is promising, but it’s ultimately unclear what kind of delay can be expected before widespread vaccine deployment can be achieved. Because of that, international border, trade, and travel restrictions continue to depress trade and migration.

Currently, the Reserve Bank is focused on maintaining economic stability and stimulating activity to blunt the ongoing impacts of the pandemic and facilitate our recovery. This means keeping the cash rate low and implementing a number of different stimulus measures to keep money moving through the system.

Interest rates remain stable, but a negative OCR may be on the horizon

While some central banks, including the European Central Bank and those of Denmark, Sweden, Japan and Switzerland, have started to experiment with negative interest rates, the RBNZ has so far pursued other monetary stimulus measures and will hold the official cash rate (OCR) at 0.25 per cent. However, the RBNZ’s policy statement indicated that progress has been made on the bank’s ability to deploy a negative cash rate “if necessary.”

How do negative interest rates work?

Low interest rates promote economic activity by making it easier and cheaper to borrow funds. Negative interest rates are the most extreme form of this, but they’re rarely used because they’re difficult to sustain. In order to offer a negative rate sustainably, a lender would need to be able to fund loans at a rate that was even lower than the negative OCR—meaning that savers would need to pay banks to hold their money for them. Instead, negative cash rates are temporarily forced with monetary injections from central banks.

RBNZ focus on monetary stimulus options

On 6 December 2020, to improve its ability to inject funds into the economy, the RBNZ began providing stimulus through a Funding for Lending Programme (FLP). This will reduce overall funding costs for banks so that they can then pass these reductions to customers through lower mortgage and business lending rates. At the same time, the ongoing Large-Scale Asset Purchase programme will continue, injecting up to $100 billion into the economy. The aim of the programme is to lower borrowing costs to households and businesses by injecting this money into the economy.

Additionally, the Reserve Bank is moving to delay the start date of increased capital requirements for banks until 2022. This allows banks more freedom to respond to the COVID-19 crisis and to aid in the economic recovery.

Reinstating LVR restrictions

RBNZ is consulting on its plans to reinstate the loan to value ratio (LVR) restrictions on high-risk lending with effect from 1 March 2021. The restrictions were removed in April to prevent any interference with the mortgage deferral scheme implemented in response to the pandemic and to help keep credit flowing. Because circumstances in the lending market have since improved, the restrictions may be reinstated to limit high-risk lending and reduce the resulting risk to financial stability.

Our View

We at Trustees Executors will continue to monitor events as they progress and work to help our partners and clients through this difficult time. As the country continues to navigate this unprecedented global crisis, we feel that it’s important for businesses, investors, and all Kiwis to keep abreast of the country’s efforts, and the RBNZ’s efforts to mitigate the damage, and facilitate our economic recovery.