The Reserve Bank (RBNZ) is expecting banks will be making more use of the Funding for Lending Programme (FLP), which ends in early December.
In theory a further $8.5 billion could be taken up by the banks before the scheme ends, potentially taking the total amount borrowed through it to over $20 billion.
The FLP was launched by the RBNZ in December 2020 to provide additional monetary stimulus to the economy to help the central bank meet its consumer price inflation and employment monetary policy remits by reducing banks’ funding costs and lowering their borrowers' interest rates. To date banks have borrowed $12.660 billion of three year money priced at the Official Cash Rate (OCR) through the FLP, led by ASB with $3.8 billion.
When it was launched it was at a time of great economic uncertainty and there was the perceived need to keep pushing interest rates down.
Now, with inflation at 7.3% and the RBNZ needing to push up interest rates to try to curb the inflation, the FLP is actually pushing against the tide. And the RBNZ has conceded that all things being equal the OCR is needing to be somewhat higher than would be the case due to the presence of the FLP.
The RBNZ has, however, previously indicated that the FLP programme will stay in place till its originally planned end in December.
RBNZ Assistant Governor/General Manager Economics, Financial Markets and Banking Karen Silk said it was important to consider what the market context was at the time the programme was launched.
She said with the Government needing to increase bond issuance to support the Large Scale Asset Purchase programme, monetary support needed so interest rates not increase substantially. The options to reduce the OCR, then at 0.25% was inhibited. The FLP supported the lower interest rates.
Silk said the three year term of the FLP and two year application window were critical design features.
“They were designed to support commercial bank confidence to incorporate its use into their medium term funding programmes at the time of launch. And banks have incorporated that usage into those medium term programmes," she said.
“My point around it is that early removal [of the programme] would undermine confidence in this as a tool, which could potentially inhibit it from being used in future should it be required again in the future."
Silk said that in the in the short term, if the programme was ended early, this could increase funding risk for banks.
"in particular there I’m noting the heightened levels of volatility we’ve been experiencing in global markets and the impact that has had in terms of banks being able to assess those markets in an efficient manner."
Silk said the level of volatility seen in more recent times in global wholesale markets has at times started to approach levels seen in 2020.
"When you are working in that kind of environment with relatively tight funding windows that is a real risk for banks.
"And banks have incorporated the usage or the availability of this into their funding plans.
"So, if we were to remove that you would immediately be putting those banks into having to raise wholesale funding in markets that have been difficult to do so.
"You know we’ve got roughly $8.5 billion available between now and December.
"If that is fully drawn it represents circa 1% of total assets.
"So, the impact that has now on the OCR is really minimal and certainly able to be accommodated in the OCR settings."
At the time the programme was launched it had the potential for banks to borrow perhaps $27-28 billion. However, the first 'window' for drawdown closed in June of this year, with the second 'window' running to December.
Silk said roughly two thirds of the available amount had been drawn in the first ‘window’, and she thought "we could see similar levels" of drawdown in the second window.
“It will not be fully drawn as a programme and at this point we are expecting drawings to be somewhere of a similar magnitude as a percentage in the current window as it was in the first window.”
She said the RBNZ was keen to keep its options open regarding the possibility of using the FLP again in future.
“We can’t predict what future circumstances will be. But it certainly was a tool that at the time had the right impact in terms of lowering retail rates in the market, which was the stimulus we were looking for at the time given the circumstances we were facing into.”
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26 Comments
"RBNZ Assistant Governor/General Manager Economics, Financial Markets and Banking Karen Silk said it was important to consider what the market context was at the time the programme was launched."
True, but those conditions no longer exist. Time to turn the spigot off.
"...My point around it is that early removal [of the programme] would undermine confidence in this as a tool, which could potentially inhibit it from being used in future should it be required again in the future..."
Translation = Implicit within our orthodoxy is never being seen to be wrong, despite the evidence to the contrary. Above all we must demonstrate infallibility over agility, and continue to let the banks know that we have their backs, as we can always soak the taxpayer to cover their recklessness (and ours).
Then stop the FLP program FGS... She used to run wholesale banking at westpac and voila, here she is dolling out tax-payer funded discount loans to, drumroll, westpac (and the others) who are making record profits at a time the average Kiwi is eating a **** sandwich due to the RBNZ's very own ineptitude.
But no, we couldn't possibly have co-governance to try and cauterise this rubbish. Let them eat cake.
I mean is there a larger conflict of interest out there? They should have just called her appointment to the RBNZ a work placement.
From Michael Reddell today "it remains extraordinary that the Bank is still undertaking new lending under the FLP until the end of this year. It was a crisis programme, launched belatedly when crisis conditions had all but passed anyway, and there has been no clear justification for continuing new loans for at least the last year"
Absolutely incredible FLP remains in place while the OCR is now 1.75% higher than pre-covid.
It looks like RBNZ Senior Execs are hitting the wires to try and PR manage their performance.
How about an FLP program for struggling SME's and households in crisis?
Commercial Banks have $48bn of deposits in their settlement accounts with RBNZ, earning 3% interest (OCR). RBNZ then create $12bn of 'loans' to the same commercial banks who pay RBNZ 3% interest on those loans (OCR). The eagle-eyed amongst you will have spotted that financially this is no different to the banks having $36bn of deposits in their settlement accounts.
All that is happening here is that RBNZ are providing the commercial banks with a way of liquidating some of the assets that are stuck in the settlement account system. These settlement accounts would usually be drained by the banks buying Govt bonds at auction (which reduces the balance of their settlement accounts). However, Govt have zero need to sell bonds at the moment as they have $30bn sat in their current account (enough to cover net spending for the next few years) and they are tightening fiscally (meaning tax income is more than expenditure).
Of course, Govt are still selling bonds (a modest $4bn this year) - but only because the finance sector needs those super safe financial assets.
This is not the full story Jfoe, FLP is a term loan - 3 years at the OCR rate. It is heavily discounted to the banks cost of 3 year funds which would be somewhere between 4.5% and 5%. The banks have to place collateral, most are self-securitising mortgages.
So, it's not really related to Settlement Account balances. It really is just a wealth transfer from public to the banks and is a complete disgrace.
Anyway, that's enough on RBNZ, oh sorry, Te Putea Matua
My point around it is that early removal [of the programme] would undermine confidence in this as a tool, which could potentially inhibit it from being used in future should it be required again in the future."
Who employs these people? If there had to be an FLP? then it should have been available only for funding businesses, not domestic property, and it should have been withdrawn long before now.
When you got it wrong, best to double down rather than admit you made a mistake.
Then they have the cheek to blame home buyers for their financial problems "Here, have another $9B but remember, its your own fault for borrowing it to buy a house you can no longer afford when we put interest rates up to 10% as a result of giving you billions in cheap money"
But it certainly was a tool that at the time had the right impact in terms of lowering retail rates in the market, which was the stimulus we were looking for at the time given the circumstances we were facing into
Wake up, today we don't need lower retail rates nor stimulus. End the FLP now
The RB are arguing early removal of the facility could undermine confidence in its use as a tool next time. However the RB was more than happy to undermine ordinary borrowers confidence in the use of low interest rates. It first encouraged FHB and others to borrow heavily by promising interest rates would be kept low for years, then pulled the rug out from underneath those borrowers by rapidly increasing the OCR, thereby raising interest rates. Why are banks treated differently?
The RBNZ spokeswoman is saying a "hightened level of volatility in global markets" means NZ banks may not be able to finance themselves, hence the need to continue the FLP program. Yet the Federal Reserve's index of financial market stress is at it lowest level in years: there is no problem accessing markets. And the local market has a keen appetite for fixed interest securities, so that's another option for the banks.
The RBNZ painted itself into a corner with its three year committment on FLP and is now trying to spin a narrative to justify it.
Why continue subsidising Australian owned banks & their excessive profits. It doesn’t make sense providing more cheap money when inflation is out of control.
RBNZ gives to the banks on one hand using FLP & takes from the general public by increasing interest rates using OCR.
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