March 10, 2020 / 2:17 AM / in 18 days

UPDATE 2-Negative rates, asset purchases in NZ's tool kit

* Orr says effective zero bound for rates far from most likely outcome

* Alternative policy steps include negative rates, forward guidance, interest rate swaps, asset purchases also a possibility (Recasts, adds economist comment)

By Swati Pandey

March 10 (Reuters) - New Zealand’s central bank would consider negative interest rates or large-scale asset purchases once its benchmark rate falls to zero, Governor Adrian Orr said on Tuesday, though such measures are not expected to be needed just yet.

The RBNZ will continue adjusting its official cash rate (OCR), currently at 1.00%, until it reaches the zero bound, Orr said in a speech titled “Navigating at Low Altitude: Monetary Policy with Very Low Interest rates”.

“The Reserve Bank of New Zealand has not, and still does not, need to use alternative monetary policy instruments to the OCR. But it is best to be prepared,” Orr said.

The chance that the cash rate would be one percentage point lower than now in two years was about 20%, which means while an effective zero bound was far from the most likely outcome it could not be ruled out, he added.

Orr’s proposed threshold for the use of unorthodox policy contrasts with that of Australia’s central bank, whose governor flagged 0.25% as the lower bound of conventional monetary policy, only a quarter of a percentage point below its current setting.

For the RBNZ, unconventional policy under consideration included forward guidance, negative rates and interest rate swaps, Orr said. It is also considering large-scale asset purchases as well as buying foreign currency assets to lower the New Zealand dollar.

“Entering the interest rate swaps market is not an option that other central banks have explored, to our knowledge,” Westpac economist Michael Gordon said.

“However, it reflects the makeup of New Zealand’s financial markets, where the swaps market is more active than the government bond market and tends to act as the benchmark for other long-term interest rates.”

Orr refrained from discussing the outlook for rates but said RBNZ policymakers would need to account for international monetary and fiscal responses at the next rate review on March 25.

Last week, the U.S. Federal Reserve slashed rates by 50 basis points in an emergency meeting to shield the economy from a fast-spreading coronavirus outbreak.

That came only days after the Reserve Bank of Australia (RBA) cut its interest rate to an all-time low of 0.50%.

Policymakers are expected to ease interest rates further as the epidemic jolts factory activity around the world, disrupting supply chains and hitting travel and tourism.

The RBNZ, which slashed interest rates by 75 basis points last year, is widely expected to ease by another 25 basis points at its March 25 rate review to a record low 0.75%. (Reporting by Swati Pandey; Editing by Gerry Doyle and Sam Holmes)

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