The Reserve Bank (RBNZ) is expecting banks will be making more use of the Funding for Lending Programme (FLP), which ends in early December.
In theory a further $8.5 billion could be taken up by the banks before the scheme ends, potentially taking the total amount borrowed through it to over $20 billion.
The FLP was launched by the RBNZ in December 2020 to provide additional monetary stimulus to the economy to help the central bank meet its consumer price inflation and employment monetary policy remits by reducing banks’ funding costs and lowering their borrowers' interest rates. To date banks have borrowed $12.660 billion of three year money priced at the Official Cash Rate (OCR) through the FLP, led by ASB with $3.8 billion.
When it was launched it was at a time of great economic uncertainty and there was the perceived need to keep pushing interest rates down.
Now, with inflation at 7.3% and the RBNZ needing to push up interest rates to try to curb the inflation, the FLP is actually pushing against the tide. And the RBNZ has conceded that all things being equal the OCR is needing to be somewhat higher than would be the case due to the presence of the FLP.
The RBNZ has, however, previously indicated that the FLP programme will stay in place till its originally planned end in December.
RBNZ Assistant Governor/General Manager Economics, Financial Markets and Banking Karen Silk said it was important to consider what the market context was at the time the programme was launched.
She said with the Government needing to increase bond issuance to support the Large Scale Asset Purchase programme, monetary support needed so interest rates not increase substantially. The options to reduce the OCR, then at 0.25% was inhibited. The FLP supported the lower interest rates.
Silk said the three year term of the FLP and two year application window were critical design features.
“They were designed to support commercial bank confidence to incorporate its use into their medium term funding programmes at the time of launch. And banks have incorporated that usage into those medium term programmes," she said.
“My point around it is that early removal [of the programme] would undermine confidence in this as a tool, which could potentially inhibit it from being used in future should it be required again in the future."
Silk said that in the in the short term, if the programme was ended early, this could increase funding risk for banks.
"in particular there I’m noting the heightened levels of volatility we’ve been experiencing in global markets and the impact that has had in terms of banks being able to assess those markets in an efficient manner."
Silk said the level of volatility seen in more recent times in global wholesale markets has at times started to approach levels seen in 2020.
"When you are working in that kind of environment with relatively tight funding windows that is a real risk for banks.
"And banks have incorporated the usage or the availability of this into their funding plans.
"So, if we were to remove that you would immediately be putting those banks into having to raise wholesale funding in markets that have been difficult to do so.
"You know we’ve got roughly $8.5 billion available between now and December.
"If that is fully drawn it represents circa 1% of total assets.
"So, the impact that has now on the OCR is really minimal and certainly able to be accommodated in the OCR settings."
At the time the programme was launched it had the potential for banks to borrow perhaps $27-28 billion. However, the first 'window' for drawdown closed in June of this year, with the second 'window' running to December.
Silk said roughly two thirds of the available amount had been drawn in the first ‘window’, and she thought "we could see similar levels" of drawdown in the second window.
“It will not be fully drawn as a programme and at this point we are expecting drawings to be somewhere of a similar magnitude as a percentage in the current window as it was in the first window.”
She said the RBNZ was keen to keep its options open regarding the possibility of using the FLP again in future.
“We can’t predict what future circumstances will be. But it certainly was a tool that at the time had the right impact in terms of lowering retail rates in the market, which was the stimulus we were looking for at the time given the circumstances we were facing into.”
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