23 Mar 2020

Reserve Bank announces further measures to support economy

11:42 am on 23 March 2020

The Reserve Bank is to buy back up to $30 billion of government bonds to give further support to the economy.

The Reserve Bank of New Zealand

Photo: RNZ / Alexander Robertson

On Friday, the central bank announced new measures, including term loans to banks, agreement with the US Federal Reserve for access to up to $US30 billion, and intervening in markets to maintain stability.

The Monetary Policy Committee (MPC) decided to implement a large scale asset purchase programme (LSAP) of New Zealand government bonds.

In a statement the Reserve Bank said the negative economic implications of the coronavirus outbreak had continued to intensify and the committee agreed that further monetary stimulus was needed to meet its inflation and employment objectives.

"Globally, the number of people infected with the virus has increased rapidly and measures to contain the outbreak have become more restrictive. Global trade and travel, and business and consumer spending have been curtailed significantly," the statement said.

"The severity of the impacts on the New Zealand economy has increased. Weaker global activity is affecting the economy through a range of channels, not just reduced trade. Domestic measures to contain the outbreak of the virus are also reducing economic activity. Employment and inflation are expected to fall relative to their targets in the near term.

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"In addition, financial conditions have tightened unnecessarily over the past week, reducing the impact of the low OCR (official cash rate) on achieving the MPC's mandate. Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding."

The Bank's statement said the asset purchase would take place over the next twelve months and involve up to $30 billion of New Zealand government bonds across a range of maturities in the secondary market.

"The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low."

The RBNZ's move had been widely expected, but the scale of the bond buyback took some observers by surprise.

"This package is huge," ANZ chief economist Sharon Zollner said in a note.

"Our analysis last week flagged the need for purchases of $15-20 billion per annum, if not more, and this announcement is even larger."

Last week the RBNZ cut its official cash rate by three-quarters of a percentage point to a record low of 0.25 percent, and brought in a raft of other measures to pump money into the economy, smooth out turmoil in financial markets, and try to halt the rise in wholesale interest rates.

The bond-buying programme will start on Wednesday with a buyback of $250m with another $250m sought on Friday.

The RBNZ's latest announcement saw wholesale long term rates fall sharply and the New Zealand dollar was down more than half a percent against most major currencies.

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