How the RBNZ is planning to get banks to cut interest rates without them worrying about pushing away savers and the funding they provide

How the RBNZ is planning to get banks to cut interest rates without them worrying about pushing away savers and the funding they provide
Image sourced from LibreShot

Borrowers and savers can expect interest rates to fall further this year without an Official Cash Rate (OCR) cut.

The Reserve Bank (RBNZ) on Wednesday strongly signalled to banks that it was preparing to introduce a programme to enable them to cut interest rates, without worrying about deterring depositors, and thus losing some of their funding.

The RBNZ’s Monetary Policy Committee directed the central bank to get ready to deploy a Funding for Lending Programme (FLP) before the end of the calendar year.

Bank economists believe the FLP could be launched as early as November 11 when the Committee releases its next Monetary Policy Statement.

This would see the RBNZ provide banks with low-cost, secured, long-term loans.

Westpac chief economist Dominick Stephens explained: “Currently, banks source their funds from a mix of transactional deposits (at zero interest), term deposits (currently approximately 1.2%), and wholesale funds (currently about 1%).

“Under an FLP, the RBNZ would offer funding to banks at a low interest rate - perhaps close to the OCR, which is currently 0.25%, or close to current swap rates which are zero.

“If banks can bring in money more cheaply, they can subsequently lend it out more cheaply while maintaining the same bank margin.

“So by providing these cheap loans to banks, the RBNZ will engineer a decrease in mortgage rates.

“There will also be an indirect effect - banks will compete less vigorously for term deposits and wholesale funds, so the interest rates on these will also fall, further reducing banks’ funding costs.”

Cost of funding, not supply of funding the issue

ASB chief economist Nick Tuffley stressed the aim of the programme would be to lower bank funding costs, and thus interest rates, in a bid to boost inflation and employment in line with the RBNZ’s monetary policy mandate.

Unlike at the 2008 Global Financial Crisis, the RBNZ isn’t trying to increase banks’ access to funding. There is currently ample liquidity.  

Both Tuffley and Stephens believed the RBNZ wouldn’t put too many conditions on the FLP, by saying banks have to use it to lend to businesses, for example.

This would see the FLP lose its effectiveness. If banks don’t make much use of the programme, their funding costs won’t fall enough for them to warrant lowering interest rates.

Bank economists happy

Tuffley said the RBNZ’s statement gives banks certainty and allows them to start planning for how they’ll use the greater flexibility around funding given to them.

ANZ chief economist Sharon Zollner agreed, saying introducing the FLP before an OCR cut means deposit rates can “safely” be cut, paving the way for lower lending rates.

Zollner said a negative OCR without a FLP could’ve been “highly detrimental” to credit supply.

The reason the RBNZ is looking to implement a FLP rather than simply cut the OCR is that in March it said it would keep the OCR at 0.25% for at least a year. It wanted to give banks time to ready their systems for a negative OCR.

In August it announced that its preference was for a negative OCR and FLP to be deployed at the same time.

But it appears that further to talking to banks about this, and also adopting a more downbeat view of the economy, the RBNZ is keen to decouple the two and provide more stimulus as soon as possible.

FLP reduces urgency of an OCR cut… technically

Kiwibank chief economist Jarrod Kerr said: “The FLP will have an immediate, and lasting impact on retail rates.

“The market took the separation of the FLP from a negative OCR as reducing the probability of negative rates. In theory, yes. An effective FLP reduces the need for a negative OCR. But, we still think a negative OCR will be deployed.”

However Kerr believed the RBNZ would go back on its word and cut the OCR at the scheduled release of its Monetary Policy Statement in February.

“If the Bank follows its forward guidance to the letter, then the earliest timing would be its pre-scheduled meeting in mid-April,” he explained.

“But the best bang for buck would be to cut in February 2021, just a few weeks before the Bank’s self-imposed guide. February is a full Monetary Policy Statement, enabling the RBNZ to ram home the bold move with a dovish statement, full of forecasts and special boxes, and press conference.

“Of all the criticism the RBNZ will get for going negative in February, we don’t think it would be the “breaking” of their 12-month guidance made in mid-March by a few weeks.”

Zollner, Tuffley and Stephens believed the RBNZ would wait until April.

Stephens said: “Assuming that the FLP interest rate is close to the OCR, then the OCR cut would reduce the interest rate at which the RBNZ lends to banks under the FLP.

“That would certainly increase the potency of the FLP, and arguably could increase the effectiveness of the OCR cut.”

QE still going full steam

The RBNZ is still continuing to use its quantitative easing (QE) or Large-Scale Asset Purchase (LSAP) programme to lower interest rates.

The thinking behind this is that if the RBNZ is a large enough player in the New Zealand Government Bond market, it will drive up the prices of these bonds, in turn lowering the interest rate on them.

Because the rates on these bonds have a strong bearing on the retail bank rates, the aim of this is likewise to encourage more borrowing, investing and spending.

The RBNZ remains committed to buying up to $100 billion of mostly New Zealand Government Bonds by June 2022.

It is continuing to front-load these purchases, to put a lot of pressure on lowering interest rates.

Zollner explained: “The pace of next week’s LSAP purchases of NZGBs is almost twice the rate of issuance, and the delta of next week’s QE is almost 2.5x that of issuance ($1.1 million vs $448,000).

"The fact that the tactical approach to purchases will continue to be aggressive gives scope for more purchases at the longer end of the curve. That in turn speaks to continued vigilance and pressure on the curve to flatten.”

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26 Comments

Money printer on max speed! You get money, you get money, you get money!

Depositors please make your way to the Barfoot and Thompson offices to collect your cut.

13
up

It is a race to the bottom with most countries now. Low to negative interest rates will create massive distortions to the markets. House prices and equity prices will increase to a point where there is no relationship to the earnings. This is called a bubble. We are creating a massive social problem for the future. The sad thing is no one seems to care while money is being made esp on property. Our political parties will not address this problem as they may not be there when the S##t hits the fan.

If it's really a race, then I reckon we should just 'Lets Do This'
Go straight to -5%
Boom.

Just give everyone a house, a mortgage and money to make the monthly payments. Then we're all rich and we're not just giving welfare to oldies!

Yes, these politicians only care about their re-election and do not care about critical societal problems. However, we cannot blame them because most kiwis vote for them to continue doing what they do.

"The government you elect is government you deserve".- Thomas Jefferson

As an Optimist I'll suggest Labour will get in as a stand-alone Government; make some un-campaigned on, 'radical' changes to the way our economy is currently structured and give the electorate 3 years to see how it goes (as Key could and should have done). If it fails, National can reverse the changes as a sure-fire vote winner, or Labour can continue on making the hard choices as required. After 2 terms, Ardern will probably be wrung out ( again, as Key was) and will have done her bit anyway. ( It was always reckoned that 7 years at The Top was enough to exhaust anyone of talent. Only the lesser lights think they can go on longer)
So this election could be one of those generational change thingies.

I hope so. Now is not the time for a lame-duck status quo government.

More people are becoming utterly sick and tired of trying to be optimistic about Labour and their intentions. It is far more likely that they will need to be pushed with considerable force, to do anything remotely radical. Meanwhile, the massive inequality plaguing this country continues to grow at an ever increasing rate before our eyes. Happy to be wrong on this. I just do not see optimism in our political leaders getting us anywhere. They have no real accountability and seem determined to usher us towards a future, where the completely disenfranchised will be forced out into the streets, to finally demand change.

The RBNZ is still continuing to use its quantitative easing (QE) or Large-Scale Asset Purchase (LSAP) programme to lower interest rates.

The thinking behind this is that if the RBNZ is a large enough player in the New Zealand Government Bond market, it will drive up the prices of these bonds, in turn lowering the interest rate on them.

Because the rates on these bonds have a strong bearing on the retail bank rates, the aim of this is likewise to encourage more borrowing, investing and spending.

The only thing US banks are investing in is liquid UST, betting they will get their loan money back, if not a return on it.

US QE is basically flat lining and yet another record big 5Y Treasury auction, another record low yield.

These persistently low interest rates (the fallacy) that’s got them perplexed is only the first clue/symptom. The lack of inflation means lack of sustainable growth meeting the economy’s potential. This doesn’t mean there will be no growth at all, like the monetary system this sucker is nonlinear, too.

But we have to recognize all the consistent evidence and signals, every one pointing in the direction of tight money. Which money, though?

We’ll pick things up where we left off yesterday, which means right here.
Link

Give to reserve bank to find new ways to support asset class.

Everyone had heard about OCR but not FLP.

As situation gets from bad to worse can expect more FLPs.

More money is to be diverted to share market, ETFs, Managed funds. The Investment Managers must be salivating at the revenue/commission.

Seems to me that with the FLP programme, we'll get a cut to -0.25% in the OCR, instead of the predicted -0.50%.

11
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Goodbye societal morals. It's hard to tell young Kiwis not to steal, with all the wealth being taken off them by officialdom. (At least, that was a consequence of financial shenanigans in earlier European society.)

I guess it's time to take the plunge. For the sake of my offspring, take the hedged bet that owning more property is a necessary evil.

If property prices stagnate/dive/collapse, maybe I'm not filthy rich in dollar terms, but NZ is likely to be a place my children can afford to live in.
If property never corrects, I'll have reserved a spot in godzone for my kids. Hopefully we find a good contractor to build a wall to keep out the protestors and anarchists.

Need change in status quo why not start by voting Green......I know it is .......but need of the time.

Vote TOP. The Greens tax policy is terribly misguided.

TOP it is.

Texas has cheap housing. Partly because they have some of the highest property taxes (rates) in the USA. A NZ$700000 home in Texas will give you an average tax bill of NZ$13000 based on assessed value. Auckland Council is maxed out on debt. People will be refinancing their mortgages at an average 2% below their previous 2-3 year fixed rates. 10k per annum interest on 500k. The council will be eyeing up that surplus household cashflow to refill their coffers

Over the last 12 or 13 years, central banks worldwide have cut interest rates to achieve inflation - yet none has materialised (except in asset prices).

It's time to accept that monetary policy doesn't actually have anything to do with consumer price inflation, and will never achieve it's stated objectives. The sooner we get rid of the RBNZ, the better.

When inflation measures are changed or inflation is responded to with a "look through" you have to wonder whether the stated aims are real, or the less oft stated aims of "wealth effect" and pushing house prices up have been the primary internal measure.

So this could make my $10k warmup loan at 0% from Westpac seem expensive??? should have waited then they could have paid me!

what will happen is the Gov't will pay y,ou money that you can then pay the bank with. It's like the old lady who swallowed the fly, just the beginning going to get a lot more crazy than this wait till we get to the horse.

The RBNZ is actively setting the country up to have a lost decade or two of complete stagnation. Front loading everyone with lots of debt will create conditions where growth must be avoided to prevent debt costs from rising too.

Banks are not doing well, and have not since 2007 roughly.
The problem is that governments and Reserve Banks make other banks lend at ridiculous low int rates and this hits profits. On top of that is that risk is rising all the time, of default and other risks to equity, like a housing decline in price for instance. So,in EU the Stoxx 600 is at a 25 year low and is down 46% YTD alone
ANZ is down 30% YTD
Goldman Sachs even, is down 16% YTD
Westpac and NAB both down 30% YTD

Yet, every time there is a laugh of a "stress" test, they all pass with flying colours, just like they did in 2007.

"cut interest rates without them worrying about pushing away savers and the funding they provide."

"it was preparing to introduce a programme to enable them to cut interest rates, without worrying about deterring depositors, and thus losing some of their funding."

“There will also be an indirect effect - banks will compete less vigorously for term deposits and wholesale funds, so the interest rates on these will also fall, further reducing banks’ funding costs.”

Of course the banks don't need to worry about the loss of funding, as they can get low-cost, secured, long-term loans from RBNZ through the FLP, but if they drop interest rates on deposits, surely they will push away savers?

Already depositors are cashing in their TD's and buying into index funds and dividend bearing ETF's. I know I have, and now I'm going to take on debt and buy into property because I'm sick of being shafted as a saver.