ANZ economists estimate the Reserve Bank's new funding for lending programme (FLP) could be as large as $50 billion and they believe the amount available will need to be considerable to ensure maximum impact of the scheme.
In an ANZ Insight publication, ANZ NZ chief economist Sharon Zollner, senior economist Liz Kendall and senior strategist David Croy get under the hood of the FLP, which they believe will be unveiled at the RBNZ's next Monetary Policy Review on November 11 and probably launched quite soon after.
The FLP, with the RBNZ making cheap loans directly to banks for the banks to then on-loan that money cheaply, is to be run alongside the RBNZ's existing large scale asset purchase (LSAP) scheme, under which the RBNZ may buy up to $100 billion (though the size may yet be increased) of mostly government bonds.
"The [FLP] will need to be available up to a considerable amount to ensure maximum impact, though the size of the programme and take-up is uncertain," the economists say.
"We don’t expect it to be as large as the LSAP, but we do expect a meaningful programme, perhaps as large as $30-50 billion."
Going lower
The economists say retail mortgage and deposit rates look set to go "meaningfully lower". And they believe if the FLP is effective, that could reduce pressure on the RBNZ to take the Official Cash Rate lower.
At the moment the OCR is at 0.25%, which is where it has been since the RBNZ dropped it sharply from 1.25% in March, with the pledge that it would remain at the current level for 12 months (from March). The RBNZ has subsequently made many mentions of the potential prospect of taking the OCR into negative territory and it has asked banks to get their systems ready by the end of this year (some weren't reading in March) to handle negative interest rates.
The 'market' is widely expecting the OCR will go below zero early next year.
The ANZ economists say that, on balance, they still expect a negative OCR next year, given the "very challenging" outlook for both the labour market and inflation.
"However, the implementation of a FLP may take the pressure off in the short term, increasing the odds of a slightly later or more gradual implementation."
The introduction of an FLP represents "a concerted effort" by the RBNZ to have a more targeted impact on retail rates with additional stimulus, complementing the LSAP programme that has seen a significant easing in wholesale interest rates, the economists say.
'Not the same impact'
"It is fair to say that the easing seen in wholesale markets has not generated the same impact in retail interest rates.
"To illustrate, the OCR is 150bps lower than it was two years ago, and in that time, the lowest new mortgage rate is 160bps lower. But over the same period, 3-year and 10-year NZGB [government bond] yields are around 200bps lower. This is because the LSAP has a direct effect on bond yields, but has less of an impact on retail interest rates, the determinants of which are more complex.
"But retail rates are where the rubber hits the road in terms of stimulus, so the RBNZ has decided to target them more directly."
The economists say that at "a high level", the LSAP and FLP would be very similar. Both are funded by central bank money (“printed money”) and thus both schemes drive up the supply of cash.
"But whereas the LSAP drives bond yields down with follow-on impacts on broader market rates, the FLP is expected to drive mortgage rates down directly by providing cheap funds straight to the banks.
"If there were an openly traded market for mortgages, SME and corporate loans (as there is for government bonds), the RBNZ could simply tilt the LSAP away from NZGBs and instead target those assets, lowering interest rates on these products directly.
Achieving the same result
"But the RBNZ can’t do that without undermining bank intermediation (which plays a crucial role in the credit aggregation and creation process and the functioning of the financial system), and nor would it want to, since that would come with credit risk and could result in the RBNZ effectively becoming a retail bank.
"But by lending funds to banks though the FLP, banks are then able to on-lend these funds and the RBNZ is able to broadly achieve the same result."
The economists say while an "all-in" approach to stimulus was the right approach at the advent of the Covid-19 crisis, the RBNZ now has the luxury of time to consider the net impacts of its policies (particularly monitoring the impact of the FLP on retail rates) and to think about trade-offs around the likes of a negative OCR, given uncertainties around its impacts, its risks, and the unknown point at which further rate cuts become counter-productive.
"We still think the RBNZ will remain dovish and aggressive in their approach to stimulus, but that doesn’t necessarily mean it’s a no-brainer that the best approach is to pull the trigger on its tools all at once.
'The OCR will be dropped'
"We still expect that the OCR will be dropped by 50bps in April, all things considered. But the introduction of the FLP tilts risks towards a lower or negative OCR occurring slightly later (say at the MPS in May) or more gradually (perhaps in 25bps increments, or with a cut to just above zero before deciding whether to take the OCR even lower).
"Of course, a sudden turn south in the data would change the picture again – as always, this view is contingent on our economic forecasts being right, and as we’ve stressed many times, uncertainty is extreme at the moment, given the unprecedented nature of the closed border, fiscal stimulus, and other policies such as the mortgage deferment scheme."
63 Comments
Heavy G.... The FLP is a gift for Aussie Banks.
$50 billion lent to them at 0.25% ( probably).
ie.. Banks will pay $125 million /yr in interest for that
If they relend at 2%..... that is an income of $500 million a yr.
More likely , they will lend out at more than 2%. If to businesses at ,say, 4%.... then they make a $1billion a yr in interest income.
A secondary gift, is that this source of funding will enable them to cut deposit rates.... ( lets call that, cream on the top)
I'd suggest the primary beneficiary of the RBNZ largess is the Aussie Banks.... they'll be loving the RBNZ....
I'm surprised the RBNZ is following thru with this.....
They have enough cash to lend already...if not, let them up deposit rates and attract some more cash to lend out. But no, we want the savers and non home owners to subsidise this intervention.
It's bull dust and punishing the wrong people i.e our young and responsible. Has it worked anywhere else yet????
Lower interest rates is only helping stock and housing price to inflate so the positive of further low will be more to support the ponzi and is not helping FHB as have seen families who were 800000 to 900000 house earlier, have now reapplied and going for 1.1 to 1.2 million dollar house based on assumption that interest will be low for ages and burying themselves in deep debt - FOMO has never been strong as now.
That's called capitalism. The alternative is communism, which is where the government decides which businesses succeed and which businesses fail by propping them up with various means (in this case QE). Historically communism doesn't end well, and we're mad if we think we can do the same thing and expect a different result.
Nothing wrong with $50 billion of gasoline IF is put into the fuel tanks of productive business.
But here's the problem - drive around any industrial estate in any town and what will you find? Carpet companies; kitchen companies; window glass companies; tap and shower showrooms; furniture showrooms etc etc etc.
What's missing are the companies that actually MAKE the stuff that those salesrooms sell. They mostly import the base product, predominantly from China.
20 years ago, Swanndri made clothes at its factory in Timaru. It employed X number of workers of many sorts. Today? Its closed and the iconic NZ brand wear come in, ready-made and packaged, by ship.
Trump may be many things 'wrong' but his idea seems to me to be on the right track. We have to start employing our own people again to make stuff for our own people. It's going to be a costly exercise in so many ways.
And if $50 billion is the start of that, good.
But if it's to support the residential property market industrial estste showrooms with importing more goods? We are a gonner.
>Nothing wrong with $50 billion of gasoline IF is put into the fuel tanks of productive business.
https://www.rbnz.govt.nz/statistics/c5
Its not being put into productive business though. Business and agricultural lending has decreased over the past year, only housing lending has increased and why wouldn't it. Creating a business is difficult, you have to actually produce something and that sounds like a pain in the ass. Much easier to buy an existing residential property, rent it out and sit back and relax while the capital gains roll in.
Even if it enters the economy by way of productive investment, it will still flow into Real Estate and other assets , over time.
Once new money enters an economy..... it flows.
Not hard to figure out where it is likely to flow. ( in the form of someones surplus income looking for an asset, as a store of value.)
I am really nodding to this comment bw you are very right, manufacturing is stuffed courtesy of the Lange govt. The NZ economy is almost a one trick pony... If the newly minted govt beats up on agriculture as well as foreign students and tourism then it will just be housing and housing service industry left. The Wealth Effect will be our continued saviour.
The next couple of weeks are going to be very interesting.
If the RBNZ doesn't realise that it has things wrong by now, and continues with plans in situ, the $50 billion isn't going to be anywhere near enough. The speculative property market will gobble that up in a heartbeat and open its mouth for more.
If it has recognised the 'unforeseen results' of its past policies, the Lending Programme is going to come with chains, not strings, attached.
Add in whatever the new Government comes up with and come January, we'll all have a better idea of how far we are in the muck, and if we have started the long crawl out of same.
If you find yourself in a hole, stop digging.
https://www.youtube.com/watch?v=_znElks13UA
"Dig up, stupid!"
But the RBNZ can’t do that without undermining bank intermediation (which plays a crucial role in the credit aggregation and creation process and the functioning of the financial system), and nor would it want to, since that would come with credit risk and could result in the RBNZ effectively becoming a retail bank.
Nice bit of propaganda there.
RBNZ is worried but still Mr Orr is it not adding fuel to fire.
Article says RBNZ threaten to cool housing market but FLP is to cool or to add fuel....
https://businessdesk.co.nz/amp/article/rbnz-threatens-cold-bath-for-hot…
Now that media and experts are raising the issue Mr Orr is comming out with warning though has no intention as his deputy made it clear that it is in their interest that house price keep on moving up so why the posture, if worried could act as it is in his power just like he acted swiftly to pump up ponzi.
Now that media and experts are raising the issue Mr Orr is comming out with warning though has no intention as his deputy made it clear that it is in their interest that house price keep on moving up so why the posture, if worried could act as it is in his power just like he acted swiftly to pump up ponzi
His narratives change like the wind. Yet, in public, he seems so confident and assured. Might even utter a few words in Maori just to show he's in touch with all of us.
It's very frustrating reading the above comments.
Their presupposition is the RBNZ are misguided and their policy will accidentally increase house prices.
The Reserve Bank has stated numerous times their policy is AIMED at increasing house prices. Interest.co.nz has done mutiple interviews with Orr where he states his.
Thank You.
And Scott had the stated aim of getting to the Pole first. At some stage on the way there Oat's tapped him on the shoulder and said "Captain. We haven't got enough strength and supplies to get there and back safely". To which Scott replied, "I know...."
Scott got the Pole, but failed; he wasn't first, and when the relief party dug his dead body out of the snow the following spring, clutched in his hand was a note with his last thoughts...."Funding for Lending Programme is sight. All's well"
he Reserve Bank has stated numerous times their policy is AIMED at increasing house prices
You made that up. The RBNZ would never claim that in a public statement. "To support asset prices" and "to provide financial stability" is different to what you are claiming, which is not true.
While not explicitly saying they want to pump house prices they have made statements that come close
https://www.interest.co.nz/banking/107444/rbnz-not-looking-%C2%A0rein%C…
"RBNZ Chief Economist and Head of Economics, Yuong Ha, wanted people to acknowledge the RBNZ’s view that while lower interest rates boost asset prices, this has a wealth effect, which boosts confidence, spending, economic activity and employment."
"From a financial stability perspective, he said: “The worse situation we’d face right now is actually if we had house prices falling."
"While he deemed house price growth to be stimulatory in the current environment, he recognised that could change."
The whole economy is like a game of musical chairs. Each year another chair is removed and so it goes on.
Unfortunately my gut feeling is that we run out of chairs next year. Nothing has really changed for me, the aim was always to pay off my debt as fast as possible and it was interesting when going through some very old bank statements the other week that my mortgage was projected to have been paid of this very month in 2020 that was taken out in 2005. My how the time has flown, it seemed so far away back then.
Lets not forget that as The Bank of England tells us, banks create 100% of the money that they lend out anyway, so they are not restricted in their lending by any sort of money supply. They have capital requirements that must be maintained relative to their lending and they also need to have non lendable reserves for the operation of their exchange settlement accounts which is where the money from QE goes to.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
The economists say that at "a high level", the LSAP and FLP would be very similar. Both are funded by central bank money (“printed money”) and thus both schemes drive up the supply of cash.
"But by lending funds to banks though the FLP, banks are then able to on-lend these funds and the RBNZ is able to broadly achieve the same result."
Under LSAP I understand designated banks sell government bonds to the RBNZ in exchange for an RBNZ interest bearing cash liability. The RBNZ retains the bonds as an offset asset against the new printed liability.
Under FLP the RBNZ prints a new cash liability against the delivery of what offsetting delivered bank asset?
Here is how I understand the reserve accounting to bear out, which has implications for the effectiveness of the FLP.
Firstly, the FLP is a loan from the RBNZ to banks:
RBNZ balance sheet: assets = +loan, liabilities = +reserves.
Banks balance sheet: assets = +reserves, liabilities = +loan.
This is analogous to what happens when a household takes out a mortgage from a bank:
Bank balance sheet: assets = +loan, liabilities = +deposits.
Household balance sheet: assets = +deposits, liabilities = +loan.
In both cases, the loan creator creates an equal amount of assets and liabilities, so the change to their equity, equal to their assets minus their liabilities, is zero. The loan borrower receives an equal amount of assets and liabilities too, so the change in their equity is also zero.
From this accounting exercise, it is clear that banks do not loan out reserves, they loan out newly created deposits. In addition, they must meet capital adequacy requirements, by holding a certain amount of RBNZ reserves at the end of the day, but those reserves are not lent out to households; deposits happen first, reserves happen last.
The constraint on bank lending is finding willing & credit-worthy borrowers at a profitable interest rate. The FLP only helps increase bank lending if banks are finding it unprofitable to meet their capital-adequacy reserve requirements. However, the banking system is currently awash with excess reserves due to the LSAP, which should be driving the inter-bank reserve lending rates down. So the question is, are banks struggling to make a profit, or are they struggling to find willing & credit-worthy borrowers? Ultimately, bringing the price of money down towards zero won't result in more mortgages if no one can afford to save up a deposit due to high rents and low interest rates on savings.
Firstly, the FLP is a loan from the RBNZ to banks:
RBNZ balance sheet: assets = +loan, liabilities = +reserves.
Banks balance sheet: assets = +reserves, liabilities = +loan.
So the RBNZ is taking commercial bank risk as an asset rather than government risk in this case.
How does the bank liability above (+loan) translate into a deposit (another bank liability?) for a potential household seeking a cheap bank loan (another bank asset?)
The bank's loan of reserves from the RBNZ is the RBNZ creating reserves. The household's loan of deposits from the bank is the bank creating deposits. The two are unrelated operations, except that the bank is required to hold a certain amount of RBNZ reserves at the end of the day. I understand it as there being two different kinds of money - only the RBNZ can add/delete reserves (to accounts held by banks at the RBNZ), only banks can add/delete deposits (to the accounts held by their own customers).
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