11 Nov 2020

Reserve Bank holds cash rate at 0.25 percent

4:10 pm on 11 November 2020

The Reserve Bank has stepped up its backing for the economy with a new lending programme for banks at rock bottom interest rates.

Reserve Bank governor Adrian Orr.

Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas

The central bank's monetary policy committee has held the official cash rate (OCR) at a record low 0.25 percent, as expected, but said a new Funding for Lending Programme (FLP) is ready to be rolled out next month.

"The committee agreed that monetary policy will need to remain stimulatory for a long time to meet the consumer price inflation and employment remit, and that it must remain prepared to provide additional support if necessary," it said in a statement.

It reaffirmed that it would continue its quantitative easing through its $100 billion government bond-buying programme.

It acknowledged that the economy had rebounded from the disruption caused by the Covid-19 related lockdowns more strongly than expected, but the outlook was still uncertain in New Zealand and overseas.

"The Covid-19 shock to the economy is very large and persistent, and inflation and employment will remain below the remit targets for a prolonged period."

The FLP is essentially a way of pumping cheap money into banks in the expectation they will pass it on to businesses and households.

The planned scheme would start next month offering loans for up to three years at the prevailing OCR rate.

The committee also said it was still looking at the possible use of a negative OCR, as well as other stimulus measures such as buying foreign assets.

The New Zealand dollar held steady against the US dollar after the announcement at 68.3 US cents.

Enough to keep OCR positive?

The Reserve Bank's funding of a lending scheme for banks may be enough to keep the official cash rate in positive territory.

The cheap wholesale rates are expected to reduce the cost of borrowing for businesses and households.

ASB chief economist Nick Tuffley said lower interest rates would give banks the resources necessary to offset any losses from an expected drop in deposits, as savers chased better returns.

He said it may also provide enough economic stimulus to hold the central bank's official cash rate at 0.25 percent.

Read the RBNZ's full monetary policy statement here.

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