ANZ economists estimate the Reserve Bank's new funding for lending programme (FLP) could be as large as $50 billion and they believe the amount available will need to be considerable to ensure maximum impact of the scheme.
In an ANZ Insight publication, ANZ NZ chief economist Sharon Zollner, senior economist Liz Kendall and senior strategist David Croy get under the hood of the FLP, which they believe will be unveiled at the RBNZ's next Monetary Policy Review on November 11 and probably launched quite soon after.
The FLP, with the RBNZ making cheap loans directly to banks for the banks to then on-loan that money cheaply, is to be run alongside the RBNZ's existing large scale asset purchase (LSAP) scheme, under which the RBNZ may buy up to $100 billion (though the size may yet be increased) of mostly government bonds.
"The [FLP] will need to be available up to a considerable amount to ensure maximum impact, though the size of the programme and take-up is uncertain," the economists say.
"We don’t expect it to be as large as the LSAP, but we do expect a meaningful programme, perhaps as large as $30-50 billion."
The economists say retail mortgage and deposit rates look set to go "meaningfully lower". And they believe if the FLP is effective, that could reduce pressure on the RBNZ to take the Official Cash Rate lower.
At the moment the OCR is at 0.25%, which is where it has been since the RBNZ dropped it sharply from 1.25% in March, with the pledge that it would remain at the current level for 12 months (from March). The RBNZ has subsequently made many mentions of the potential prospect of taking the OCR into negative territory and it has asked banks to get their systems ready by the end of this year (some weren't reading in March) to handle negative interest rates.
The 'market' is widely expecting the OCR will go below zero early next year.
The ANZ economists say that, on balance, they still expect a negative OCR next year, given the "very challenging" outlook for both the labour market and inflation.
"However, the implementation of a FLP may take the pressure off in the short term, increasing the odds of a slightly later or more gradual implementation."
The introduction of an FLP represents "a concerted effort" by the RBNZ to have a more targeted impact on retail rates with additional stimulus, complementing the LSAP programme that has seen a significant easing in wholesale interest rates, the economists say.
'Not the same impact'
"It is fair to say that the easing seen in wholesale markets has not generated the same impact in retail interest rates.
"To illustrate, the OCR is 150bps lower than it was two years ago, and in that time, the lowest new mortgage rate is 160bps lower. But over the same period, 3-year and 10-year NZGB [government bond] yields are around 200bps lower. This is because the LSAP has a direct effect on bond yields, but has less of an impact on retail interest rates, the determinants of which are more complex.
"But retail rates are where the rubber hits the road in terms of stimulus, so the RBNZ has decided to target them more directly."
The economists say that at "a high level", the LSAP and FLP would be very similar. Both are funded by central bank money (“printed money”) and thus both schemes drive up the supply of cash.
"But whereas the LSAP drives bond yields down with follow-on impacts on broader market rates, the FLP is expected to drive mortgage rates down directly by providing cheap funds straight to the banks.
"If there were an openly traded market for mortgages, SME and corporate loans (as there is for government bonds), the RBNZ could simply tilt the LSAP away from NZGBs and instead target those assets, lowering interest rates on these products directly.
Achieving the same result
"But the RBNZ can’t do that without undermining bank intermediation (which plays a crucial role in the credit aggregation and creation process and the functioning of the financial system), and nor would it want to, since that would come with credit risk and could result in the RBNZ effectively becoming a retail bank.
"But by lending funds to banks though the FLP, banks are then able to on-lend these funds and the RBNZ is able to broadly achieve the same result."
The economists say while an "all-in" approach to stimulus was the right approach at the advent of the Covid-19 crisis, the RBNZ now has the luxury of time to consider the net impacts of its policies (particularly monitoring the impact of the FLP on retail rates) and to think about trade-offs around the likes of a negative OCR, given uncertainties around its impacts, its risks, and the unknown point at which further rate cuts become counter-productive.
"We still think the RBNZ will remain dovish and aggressive in their approach to stimulus, but that doesn’t necessarily mean it’s a no-brainer that the best approach is to pull the trigger on its tools all at once.
'The OCR will be dropped'
"We still expect that the OCR will be dropped by 50bps in April, all things considered. But the introduction of the FLP tilts risks towards a lower or negative OCR occurring slightly later (say at the MPS in May) or more gradually (perhaps in 25bps increments, or with a cut to just above zero before deciding whether to take the OCR even lower).
"Of course, a sudden turn south in the data would change the picture again – as always, this view is contingent on our economic forecasts being right, and as we’ve stressed many times, uncertainty is extreme at the moment, given the unprecedented nature of the closed border, fiscal stimulus, and other policies such as the mortgage deferment scheme."