The Reserve Bank of New Zealand expanded its monetary stimulus and retained its interest rate as the economic shock caused by the pandemic is set to remain for a prolonged period.
The Monetary Policy Committee decided to begin a Funding for Lending Programme in December in order to reduce banks’ funding costs and lower interest rates.
The committee also decided to continue with the asset purchase programme up to NZ$100 billion and to maintain the official cash rate at 0.25 percent.
Policymakers viewed that economic activity since the August monetary policy statement has proved more resilient that earlier assumed. However, the Covid-19 shock to the economy is very large and persistent, and inflation and employment will remain below the remit targets for a prolonged period.
The MPC expects an ongoing increase in unemployment as the economy adjusts. Consumer price inflation was also projected to remain at the lower-end of the remit target range for a period, and inflation expectations remain subdued.
Policymakers observed that the banking system is on track to be operationally ready for negative interest rates by year end. The committee agreed that it was prepared to lower the interest to provide additional stimulus if required.
The economic scarring from the pandemic should be enough for the Bank to cut next year even if a vaccine has started rolling out, Ben Udy, an economist at Capital Economics said.
As the bank reconfirmed its earlier guidance that rates would remain on hold until March 2021, the economist pencilled in a 50 basis point cut to -0.25 percent at the April meeting.
In a separate statement, the bank said it is further delaying the start of increases in bank capital until 2022 to allow banks continued headroom to respond to the effects of the Covid-19 pandemic and to support the economic recovery.
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