Business

Reserve Bank holds OCR steady at 0.25 percent

15:29 pm on 13 May 2020

The Reserve Bank has held its benchmark interest rate at a record low, but intends to buy back more governmment bonds to support the economy.

Reserve Bank governor Adrian Orr Photo: RNZ / Cole Eastham-Farrelly

The official cash rate was kept steady at a record low of 0.25 percent, as economists expected.

It had slashed the OCR by three-quarters of a percentage point in mid-March before the lockdown was imposed.

Reserve Bank (RBNZ) governor Adrian Orr said the Covid-19 pandemic's impact on growth would last a long time in New Zealand and overseas.

"The global economic disruption caused by the Covid-19 pandemic is expected to persist and lead to lower economic growth, employment, and inflation both in New Zealand and abroad."

"Even if New Zealand successfully contains the spread of disease locally, reduced world activity will mean lower demand for many of New Zealand's exports," Orr said.

He said monetary policy would be secondary to government spending programmes in countering the pandemic effects, but the RBNZ's bond buying would be a suitable and necessary ally to government action.

The RBNZ has been buying government bonds on the secondary market as a way of pumping money into the economy but also as a way to hold interest rates.

The central bank will expand the Large Scale Asset Programme (LSAP) from the current target of $33 billion up to $60bn.

"The expansion to the LSAP programme aims to continue to reduce the cost of borrowing quickly and sharply. This is preferable to delivering a smaller amount of stimulus now, only to risk later realising more should have been done," Orr said.

He said retail interest rates were expected to fall further, but the committee was willing to look at a further cut in the OCR if necessary, and could use other measures such as broadening the range of securities it would buy and providing fixed term loans to banks.

Some economists and financial commentators have been pushing the case for negative interest rates, which the RBNZ has been reluctant to accept.

The RBNZ's baseline economic forecasts pointed the economy contracting by 21.8 percent in the three months ended June, rebounding by 23.8 percent in the following quarter.

It expected the economy to shrink by 8.4 percent for the year ended March 2021.

Unemployment was forecast to peak at 9 percent this year, and house prices to fall by the same amount, while inflation is expected to turn negative over the coming year.

ASB Bank chief economist Nick Tuffley said decision was as expected.

"We expect the RBNZ will undertake whatever bond purchases it deems necessary to keep NZ interest rates low, and adjust its purchase programme as needed."

"A negative OCR remains a possibility, but still seems unlikely over 2020... we have reservations over how beneficial a negative OCR would be in promoting easy credit conditions," he said.

The New Zealand dollar fell close to half a cent to 60.3 US cents after the announcement.