Reserve Bank keeps OCR at record low of 0.25 per cent

Author
NZ Herald,
Publish Date
Wed, 13 May 2020, 2:48PM
Reserve Bank Governor Adrian Orr. Photo / File
Reserve Bank Governor Adrian Orr. Photo / File

Reserve Bank keeps OCR at record low of 0.25 per cent

Author
NZ Herald,
Publish Date
Wed, 13 May 2020, 2:48PM

The Reserve Bank has today announced no change to the Official Cash Rate (OCR), keeping it at a record low 0.25 per cent.

The Reserve Bank did, however, suggest that it remained open to dropping the OCR at a later stage if needed - potentially taking them into negative territory.

The Reserve Bank said 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," the Reserve Bank warned.

The one silver lining is that this means that New Zealanders will continue to enjoy record low interest rates on their mortgages.

The RBNZ says mortgage rates should fall.

"We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers," the RBNZ said.

A number of banks announced two-year mortgage rates of under 3 per cent for the first time earlier this month.

The flip side of this, of course, is that New Zealanders with deposits in the bank will continue earning lower interest on their savings.

In addition to the OCR announcement, the Reserve Bank also announced it would increase its quantitive easing budge from $33 billion to $60 billion to aid the economy.

The Reserve Bank said this step was being taken 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," the Reserve Bank said.

Quantitative Easing (QE) Q&A:

What is QE?

Quantitative easing (QE) is a tool that central banks use to inject cash into the economy when other measures - like cutting interest rates - reach their limit.

How does it work?

The bank creates the funds to buy government bonds on the secondary market. This puts cash into the financial system. Its role as large-scale buyer puts a cap on government bond yields debt and reassures markets when they are stressed and interest rates spike.

Why now?

The RBNZ has already cut rates as low as it practically can, leaving QE as its preferred next tool.

With trillions of dollars worth of bonds issued to fund stimulus globally markets were stretched and rates were rising on NZ government bonds.

The RBNZ has acted now to put downward pressure on those rates and to help cushion the economy and facilitate the issue of more government bonds to get us through the crisis.

How much?

The increase of the limit today to $60b over the next 12 months is huge. At more than 10 per cent of NZ's total annual GDP, it is substantial sum.

 

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