New Zealand holds rates, flags readiness for more stimulus

WELLINGTON (Reuters) - New Zealand’s central bank kept rates unchanged on Wednesday and maintained its pace of quantitative easing, but struck a dovish tone by flagging it was ready to ease policy to restore an economy hit by the coronavirus pandemic.

Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington, March 22, 2016. REUTERS/Rebecca Howard/File Photo

The Pacific nation is one of the first countries to successfully contain COVID-19 and re-open its economy. However, strict lockdown measures enforced to limit the virus have slammed growth, with unemployment expected to peak and businesses facing closure.

The Reserve Bank of New Zealand (RBNZ) held the official cash rate at a record low of 0.25%, as widely expected, saying economic activity was coming back faster than expected.

It also maintained QE, the large scale asset purchase (LSAP) programme, at NZ$60 billion ($38.78 billion) and said it would review this at regular intervals.

However, the RBNZ warned it was not yet clear whether this year’s massive stimulus was enough to help the central bank meet its mandate of lifting inflation and increasing employment.

While economic demand was seen improving, risks remained skewed to the downside.

“The Monetary Policy Committee is prepared to provide additional stimulus as necessary,” RBNZ said in a post-meeting statement entitled “Monetary Policy Easing to continue”.

“As well as potentially expanding the LSAP programme, the Committee continues to prepare for the use of additional monetary policy tools as needed.”

The central bank’s dovish tone sent the New Zealand dollar lower to $0.6450 from $0.6500.

Of particular focus for investors is the prospect of negative interest rates, which the RBNZ flagged in the last meeting in May when it doubled its QE programme.

RBNZ said it will outline its QE plans and readiness to deploy alternative monetary policy tools in the next meeting in August.

It added the appreciation of New Zealand’s exchange rate has placed further pressure on export earnings.

Despite some improved conditions, the RBNZ is still looking at looser, not tighter, monetary policy, Westpac Chief Economist Dominick Stephens said in a note.

“The RBNZ has basically kicked the can down the road,” he said.

Separately, Prime Minister Jacinda Ardern’s centre-left government has launched record spending to revive the economy, which shrank in the first quarter and is expected to decline further in the current quarter.

($1 = 1.5473 New Zealand dollars)

Reporting by Praveen Menon and Swati Pandey; Editing by Sam Holmes