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Reserve Bank keeps OCR at 0.25%

Reserve Bank keeps OCR at 0.25%

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The Reserve Bank (RBNZ) has left its benchmark interest rate unchanged at a record low 0.25 percent, and signalled it’s ready to take further action probably before the end of the year as it awaits an expected rise in unemployment and business closures.

Generic money.

Photo: RNZ / Rebekah Parsons-King

In its six-weekly rate review the RBNZ monetary committee (MPC) said the $100 billion government bond buying programme, known as quantitative easing, would continue.

“This action is necessary to further lower household and business borrowing rates in order to achieve the committee’s inflation and employment remit,” it said in a statement.

The committee said the economy continued to suffer from the effects of the lockdowns and the uncertain outlook at home and abroad.

“The level of economic activity remains significantly below that experienced prior to the Covid-19 economic disruption. The ongoing virus-led activity restrictions – most notably in Auckland – had also continued to dampen economic activity, and business and consumer confidence.

“In line with the weak underlying international and domestic economic conditions, the committee expects a rise in unemployment and an increase in firm closures.”

The RBNZ has committed to keep the cash rate at its current level at least until March next year but most economic commentators expect it will take the rate below zero to put further pressure on interest rates. It has also signalled other possible measures such as targeted loans, called funding for lending (FLP), and buying foreign assets.

“The committee maintained its view… that a package of a FLP and a lower or negative OCR could provide an effective way to deliver additional monetary stimulus.”

The FLP would see the Reserve Bank lend money to retail banks at the lowest rates on condition it was then lent to businesses.

The minutes of the MPC pointed to differences on how strong the housing market will be with some members thinking the current strength if maintained would bolster spending and construction, while others thought growing unemployment and low population growth would constrain price rises.

An economist said the statement showed the Reserve Bank would be rolling out the lending programme by year’s end.

“The RBNZ wants to add stimulus sooner rather than later. The RBNZ is giving a clear signal that the FLP scheme will be coming soon, which will enable banks to start anticipating the implications of the FLP for bank funding,” ASB chief economist Nick Tuffley said.

The New Zealand dollar briefly gained more than a third of a cent before easing back to settle modestly higher at 66.2 US cents.

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