The Reserve Bank has confirmed a bank funding for lending programme will start in early December.
Confirming no change to the Official Cash Rate, in a monetary policy statement (MPS) announcement on Wednesday the Reserve Bank said the funding for lending (FLP) programme is aimed at lowering borrowing costs for households and businesses.
This will be achieved by giving banks access to a pool of funding at the Official Cash Rate (0.25 percent), making it cheaper for them to lend. Success will depend on banks passing on cost savings. The desired outcome is to reduce interest rates, including deposit and borrowing rates, to encourage people to borrow and invest.
Fisher Funds head of fixed income David McLeish said as the FLP had few strings attached, it's clear the Reserve Bank wants banks to take up the programme as quickly as possible.
"The Reserve Bank made the logical choice to using the Official Cash Rate as the rate in which it will lend to banks. This rate compares very favourably with other sources of bank funding such as term deposits," McLeish said.
But he questions whether the initial size of the programme, around $20 billion, is enough. For the FLP to drive down interest rates across the system, it needs to be a viable alternative to other sources of cash.
"I think it's attractively priced, but I wonder if it's large enough for the banks to meaningfully reduce their rates on deposits and mortgages," McLeish added.
Before the announcement, economists questioned whether the LVR would be tailored towards supporting business lending. It could be geared away from property investment borrowing, a key contributor to an overheated housing market.
But the Reserve Bank said incentives would lower the programme's effectiveness. This would be the role of the banking sector, or Government initiatives. At Wednesday's media conference, indications were that loan-to-value (LVR) restrictions will be reinstated, reducing higher-risk lending.
Initial success of the FLP will be lower interest rates, but overall success will be how many people use them to borrow and invest.
"That won't be evident until mid or late next year."
Since the last MPS in August, the Reserve Bank noted that the economic impact of COVID-19 was lower than expected. Demand for New Zealand exports including dairy, was resilient. Commodity and asset prices were firm.
Despite COVID-19 restrictions, overall spending rebounded higher than expected. House prices increased 7 percent from June to September, with sales at the highest levels since June 2016. Share prices also increased, both supporting household spending
On the downside, uncertainty continued to affect business investment and employment intentions. Accounting for around 6 percent of nominal GDP, closed borders affect demand for international tourism and education. Importers had issues sourcing stock and production inputs, with long lead times. The unemployment rate increased to 5.3 percent in the September 2020 quarter, with further job losses likely.
In addition to the FLP, it indicated that a lower or negative OCR, purchases of foreign assets and interest rate swaps would still be considered.
Despite earlier forecasts of a 75 basis point OCR cut in April 2021, ASB is now forecasting that the OCR will remain on hold.
"Given the strength of the recovery to-date and clear impact of low interest rates on households, we expect the RBNZ will conclude the FLP will deliver enough stimulus for the time being and leave further OCR cuts up its sleeve in case events take a further turn for the worst," chief economist Nick Tuffley said.
As it's now confirmed the FLP will start in December, when can borrowers expect rates to fall?
Tuffley says as it will take time for the scheme to have an effect on the overall cost of banks' funding, there's unlikely to be an immediate impact.
"For example, the terms of current term deposits would need to come to an end, and term wholesale funding trachea need to reach maturity," Tuffley said.
"Over time, we'd expect term deposit rates to gradually fall, in turn feeding through to lower lending rates," he added.
