Economic Weekly: RBNZ readying to rock and roll on FLP

Last week, the RBNZ released its September monetary policy review. For those aficionados who recall the previous monetary policy statement, it was playing a very familiar song, with the OCR on hold at 0.25%, and the Large-Scale Asset Purchase Programme still pegged at $100 billion. The RBNZ kept singing the blues, highlighting the downbeat economic global outlook, and “unprecedented contraction” in Q2 GDP. The bank continued to highlight its three favourite options for additional monetary stimulus, with a ‘Funding for Lending Programme’ (FLP) – a cheap form of direct lending to banks, rounding out the trio with a negative OCR and foreign asset purchases.

Yet there was a notable departure. Previously, the Bank had suggested it would roll out alternative monetary policy as part of a joint package of measures. This time around, the RBNZ suggested they could be deployed independently, with the FLP being the first. The review stated that the FLP would be ready for deployment by the end of this calendar year (possibly as soon as November), rather than alongside a negative OCR in 2021.  In other words, the RBNZ has kept the same band playing the same tunes, but given one of the members a solo, and with a slightly faster tempo.

The news that the FLP could be deployed sooner and separately, was music to our ears. An earlier FLP gives financial institutions a measure of certainty and speeds up the transmission of lower borrowing costs to businesses and consumers. We could envisage the FLP being launched as early as the November MPS. We still expect the RBNZ to cut the OCR in 2021, with April as the most likely date. You can read our full review here.

Still, the shape and speed of further stimulus is hard to predict amidst all the uncertainty. Even interpreting the data when it does come in can be a challenge – what sounds like a sweet melody can be masking more worrying noises. For example, last week’s August trade showed a solid year-on-year lift in exports, seemingly highlighting the resilience of the NZ export sector. While that was true to a certain extent, the headline figures were also inflated by a large shipment of aircraft overseas for long-term storage while the border stays shut – a resonant reminder of tough times ahead. On a similar theme, data on the household sector seems to be both encouraging and worrying. On page 2, economist Mark Smith helps you interpret the cacophony.