The Reserve Bank funding for lending programme would effectively be a cheap loan to banks to support borrowing, a financial expert says.
It comes as The Reserve Bank confirmed on Wednesday that the Official Cash Rate (OCR) remains at 0.25 percent and the Large Scale Asset Purchase (LSAP) programme will continue to keep interest rates low. Acknowledging that long-term monetary support is needed to help the economy through COVID-19, it said a term funding for lending programme will be ready by the end of the year.
Due to the consequences of a negative OCR on bank earnings, the term funding for lending programme was originally earmarked to be launched at the same time. As it is now considering the programme as a standalone, Fisher Funds senior portfolio manager David McLeish, said the Reserve Bank must recognise the benefits and want to get it done earlier than March next year.
"The idea is that if the Reserve Bank gives banks cheap money, the hope is they'll on-lend that to their customers at similar low rates, with a small margin," McLeish explained.
But while the programme could help keep interest rates low, the detail is yet to be worked through. One question is whether banks would pass the full benefit to borrowers. Uncertainty and rising unemployment may reduce demand for lending - and banks' willingness to do so.
"Every loan requires a willing borrower: we're seeing lots of activity in certain parts of the economy, particularly residential mortgages. But it's going to need willing borrowers to take out more borrowing in the face of an uncertain future," McLeish added.
Kiwibank chief economist Jarrod Kerr said the economy has yet to experience the full force of the COVID-19 pandemic. He supports a focus on the funding for lending programme this year.
"The RBNZ has committed to doing nothing with the OCR until March 2021. The funding for lending programme could be started in November, to get the ball rolling," Kerr said.
