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Economists expect the RBNZ will consider what impact its $28 billion Funding for Lending Programme has on interest rates before taking a knife to the OCR

Economists expect the RBNZ will consider what impact its $28 billion Funding for Lending Programme has on interest rates before taking a knife to the OCR
Adrian Orr

Bank economists believe the odds of the Reserve Bank (RBNZ) cutting the Official Cash Rate (OCR) into negative territory in early 2021 have fallen.  

A number of bank economists revisited their OCR forecasts following the RBNZ on Wednesday confirming it would, from December, provide retail banks with cheap wholesale funding to help them lower mortgage and term deposit rates.

The aim is to encourage more borrowing and spending to boost inflation and employment in line with the RBNZ’s mandate.

The RBNZ confirmed it would figuratively print up to $28 billion for banks to borrow and on-lend to whomever they want via its new Funding for Lending Programme (FLP).

While the RBNZ said monetary policy would need to remain stimulatory for a “long time” and it remained prepared to provide additional support if necessary, it noted economic activity had proven more “resilient” than it expected at its August Monetary Policy Statement.

Asked at a media conference whether the probability of a negative OCR had been reduced, Governor Adrian Orr said: “It’s too early to tell. We want to leave all options open. We will be revisiting that decision at our next Monetary Policy Committee [meeting], which is in February.”

RBNZ expected to take a breather

Nonetheless, ASB economists no longer see the RBNZ cutting the OCR next year. Provided banks use the RBNZ’s cheap funding to lower retail rates, they see the OCR staying at 0.25%.  

BNZ economists likewise see the OCR “flatlining” at 0.25%. They previously “reluctantly” forecast a negative OCR, because they thought that’s what the RBNZ had told the market it wanted to do.

ANZ economists now see the RBNZ cutting the OCR to 0.1% in May, and taking stock before lowering it to -0.25% in August. They had seen a cut to this level in April.

Kiwibank economists have pencilled in a cut to -0.25% in May, rather than a cut to -0.5% in February.

Westpac economists haven’t changed their OCR track and continue to see the RBNZ making a series of cuts through the middle of 2021 to take the rate to -0.5%. They expect this despite their “firm expectation” the economy and housing market will outperform the RBNZ’s expectations over the next six months.

Sean Keane of Triple T Consulting made the point that come February, it might be too soon for the RBNZ to see the effects of its FLP.

However the economists generally didn’t completely rule out an OCR cut as early as February, noting the country is potentially a major Covid-19 outbreak away from another lockdown.

Should the government provide another wage subsidy in this scenario, increasing the RBNZ's $100 billion government bond-buying, QE programme might be appropriate. Should it not provide much support, an OCR cut could be the way to go.

Nonetheless, for now the RBNZ has an opportunity to wait and see what impact the FLP has before loosening the monetary policy tap even further.

RBNZ confident in the FLP's potency

The RBNZ stressed the success of the programme would hinge on its effect on interest rates, not on its size.

“We could see a scenario where FLP funds are only drawn down in small amounts, but its availability encourages a broad decline in interest rates,” the RBNZ said in its Monetary Policy Statement.

“We would consider this scenario successful, even though actual use of the FLP would seem minimal.”

While Westpac economists see the FLP slicing 25 basis points off mortgage rates and a bit more off term deposit rates, Orr wouldn’t put a number on this.

But he believed the impact of the FLP would be greater than cutting the OCR to 0.1%, as the Reserve Bank of Australia has done.

While banks won’t be made to on-lend FLP funding, or forced to lower rates, RBNZ Assistant Governor Christian Hawkesby said: “We have a very high degree of confidence it will get passed on.”

Orr said the RBNZ would be watching banks very closely.

Hawkesby reiterated the RBNZ didn’t want to restrict the uptake of the FLP by putting conditions on it, like requiring banks to on-lend the funds to businesses rather than property investors. This would make it less effective in driving down rates.

To date, the vast bulk of the RBNZ's stimulus has flown through the housing market, with lending against housing up, and business and agricultural lending down.

Here’s a summary of what the FLP will look like:

High house price inflation not the RBNZ's problem

The RBNZ remained of the view it was better for it to risk loosening monetary too much and overshooting its inflation target temporarily, than doing too little.

Orr noted it wasn’t the RBNZ’s job to control house prices.

Westpac economists see house price inflation overshooting the RBNZ’s forecasts dramatically, getting into the double digits next year.

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"Orr noted it wasn’t the RBNZ’s job to control house prices."

Maybe Orr could enlighten us as to the correct authority might be then.

I'm assuming it's the one that should be firing him?

It was Labour who criticised the Key Government when house prices went up by 25% in one year. What has changed? Labour are just a bunch of hypocrites.

The public should be told how many investment houses Orr owns. He is the property investors / speculator's dream.

Labour banned foreign buyers and extended the bright line test to 5 years. It was political pressure that resulted in the bright line test in the first place.

Despite being in power for 9 years, National never did anything about the RMA. In fact Key would never even admit to there being a housing crisis, despite him saying it as leader of the opposition in 2008.

As bad as National were (are), I think Labour is now fair game this term. The sheen will definitely come off Jacinda if they're unable to address some of these pressing issues.

The mask slipped long ago. She is slimier than John Key. That's a tough achievement.

Agreed but you've gotta to really watch this stuff closely to see it. Actions speak louder than words. Fortunately for here, those actions are in areas the public doesn't pay attention to whereas the 'kindness' is right there in the public eye

The Government is the boss and sets Mr Orr's objectives under the Reserve Bank of New Zealand Act 1989. If Labour wanted to scrap current monetary policy and CPI targeting it could. They don't want to change it (as it works) so they throw Mr Orr under the bus for all the whingers to moan about.

Don't hate the player, hate the game.

The cheaper interest rates will be used to outbid each other for ever more expensive houses.

Im short, if you want to make easy money in NZ, buy houses. You don't have to worry, the RB has got your back and the tax system is largely in your favour (no capital gains tax, land tax, stamp duty or wealth tax).

You are, of course, absolutely correct.

The most important thing we could teach high school graduates is the true path to wealth and prosperity in this country and it sure as hell doesn't involve study or hard work or entrepreneurialism.

The only question I have is how long can this continue until it collapses under the weight of its own absurdity and takes the whole country down with it?

One thing is for sure: when it happens, it won't take my money with it, as by then I will have close to zero deposits with NZ banks.
I strongly suggest all NZ savers take the same approach and all abandon the NZ banks, at least until risk is appropriately priced in the NZ financial market.

I think you'll find most people are abandoning the banks, the money is going into the property sector. The banks are just lending terminals, the old days of depositing at banks is long gone, even Orr said people need to find alternatives then just keeping money in banks.

Totally! The number of houses I'm seeing that sold 2 years ago for 800k @4.5% that are now selling for 1mill @ 2.5% (south central Auckland). chuck those numbers into an interest rate calculator.... The later is cheaper per week ergo, you need less rent to be "cash flow positive" as they say...
I do wonder why he didn't ring fence all this cheap cash for business lending? Might have been used to build more houses and jobs rather than just inflating assets.
I wonder if it might cause rents to rise in the medium term faster than they might have as more investors stretch, this might actually put pressure on business to increase wages to keep up. The opposite of what it was intended to do!

The focus will be on existing owners who will be able to significantly reduce their servicing costs with lower mortgage rates. Less money paid on interest means more circulating through the economy. This point seems to be going over most people's heads (on this site anyway).

It would be interesting to see the stats on that, what % have been able to refix at the lower rates etc. And then how many took that extra cash flow and went and bought more property.

I'm willing to bet most will just increase repayments, and given the size of mortgages these days it'll likely be years before they're debt free to 'stimulate the economy'.

Yeah if that was the intention, helicopter money seems a much "fairer" way to do it

Fairer for those who get a net benefit, not for the poor working taxpayers that are paying for it.

RBNZ don't bet, they base their decisions on data and modelling.


Thanks Jenée for pressing Orr on the house price issue yesterday, he didn't like it. Very concerning to see his blasé attitude shouldering any responsibility.

A few headlines this morning from Herald etc:
Auckland house prices: Buying frenzy tipped after Reserve Bank announcements
Reserve Bank 'guaranteed' housing boom will continue over summer

This is going to end well...

Yeah great job nobody else has been calling him out recently!

I wonder if fast rising house prices could have an impact on long-term economic stability... Nah, surely not.

Orr appears to have forgotten that financial stability is part of the core mission of the RBNZ. And the Government is doing nothing about it. Orr must be sacked before it is too late.

Can't find when the RBNZ will implement the FLP.

I was gonna print money and buy a house, but someone beat me to it.

I thought it was illegal to counterfeit paper money, so it seems only a Bank can be a criminal enterprise, these days....and get away with it.

How strange is it that people get sent to jail, for a petty crime, but others get to Lord it, or get paid and called a Prime Muneyster.

Dishonestey prevails...screw you jack....I am alright.

Why have a business, why work, just become a Politician, or a Bwanker.......Then we can just produce Nothing worth having .....and starve ourselves to death.

And I do believe it is working, nobody to pick the fruit of our orchardists, etc.....Go figure.....

What have we done to this strange land, where people pick over priced houses, over starving to death....cos someone will produce food.....Magically......when all is said and done...

Nuts, do not grow on trees anymore, they inhabit Parliarment and Financial Institutions, I do believe, we will need more NutHouses, when this is over, it is ......Totally it not.

Friday the 13th....LVR.........short for Leverage, ...Capital Idea. ...DUH.

Interesting watching the body language in this interview. The 4 from the RBNZ are agitated, nervous and scared, and clearly lying. Bernard Hickey is frustrated with the bullshit Orr is spouting and is thinking to himself what am I doing here. The other reporters asking questions are all scared-looking like they don't want to ask the wrong question or they won't be allowed back. The final question from the attractive lady was totally relevant, yet she was shot down by Orr because he didn't want to answer. He is a lying bully and needs to go.