New Zealand central bank holds rates but hints at further easing

WELLINGTON (Reuters) - New Zealand’s central bank held its official cash rate at a record low on Wednesday but hinted at further easing and warned the economy may need support for a long time as the world grapples with the coronavirus pandemic.

FILE PHOTO: Pedestrians walk near the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray

The decision to hold the Official Cash Rate (OCR) at 0.25% was in line with the unanimous expectations of economists in a Reuters poll.

However, the RBNZ’s warning of job losses and business closures in its commentary cemented expectations that it would move to negative rates, which sent the New Zealand dollar down 0.3%.

“The Reserve Bank of New Zealand continued to set the stage for negative rates today and we think the OCR will be cut into negative territory early next year,” said Ben Udy, analyst at Capital Economics.

The bank also retained its large scale asset purchase (LSAP) programme at NZ$100 billion ($66.2 billion), as announced in August.

The RBNZ said in its statement that further stimulus may be needed and that it was prepared to use additional tools like a Funding for Lending Programme (FLP), a negative OCR, and purchases of foreign assets.

“Members agreed that monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability,” RBNZ said in a post-meeting statement.

The central bank said the FLP, a low-interest loan programme for banks, would be ready before the end of this year.

The dovish meeting comes as expectations grow that neighbouring Australia may also need to cut interest rates as soon as next month.

The RBNZ stunned markets earlier this year with a 75 basis point cut in an emergency meeting in March as COVID-19 broke out across New Zealand.

New Zealand fell into its deepest economic recession on record in the second quarter, data showed last week, although the contraction was slightly less severe than analysts had expected.

The RBNZ said the ongoing virus-led activity restrictions, especially during a second wave of infections in Auckland, continued to dampen economic activity, and business and consumer confidence.

Reporting by Praveen Menon; Editing by Sam Holmes