The Monetary Policy Committee has agreed to significantly expand the Large Scale Asset Purchase (LSAP) programme
potential to $60 billion, up from the previous $33 billion limit. The LSAP programme includes NZ Government Bonds, Local
Government Funding Agency Bonds and, now, NZ Government Inflation-Indexed Bonds.
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 Monetary Policy Committee is committed to achieving its employment and inflation objectives. The main support for
the economy in this environment is appropriately being provided through increased fiscal spending. However, monetary
policy will continue to provide significant support through keeping interest rates low for the foreseeable future.
The balance of economic risks remains to the downside. 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.
We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail
customers. It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of
our LSAP programme.
The Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March. The
Monetary Policy Committee is prepared to use additional monetary policy tools if and when needed, including reducing the
OCR further, adding other types of assets to the LSAP programme, and providing fixed term loans to banks. The
Committee’s decisions are guided by the Reserve Bank’s mandate and our decision making principles on the use of
alternative monetary policy instruments.
Meitaki, thanks.Summary Record of Meeting - May 2020 Statement
The Monetary Policy Committee noted that the economic situation has deteriorated since the previous policy meeting. The
COVID-19 pandemic is affecting economic activity throughout the world. The unprecedented health crisis has led many
countries to introduce measures to contain the spread of disease. In New Zealand, activity has fallen sharply as a
result of the pandemic and containment measures. The sharp contraction in activity is expected to reduce inflation and
employment below the Bank’s objectives for several years.
Members discussed the significant uncertainties surrounding the economic outlook. The pandemic and restrictions on the
movement of people are uncharted territory for modern economic policy. Here, and overseas, there is uncertainty about
the impact of containment measures on economic activity. Monetary policy is using tools which have not been deployed
before in New Zealand, and their degree of success is something that will become evident over time.
To help understand the uncertainties, the Committee discussed several different scenarios for the economic outlook.
Members agreed that the situation is too uncertain to allow any one scenario to be treated as a central projection.
Three scenarios were discussed, including what could happen if extended containment measures are required. Members noted
that the baseline scenario was the most optimistic of the three. All three scenarios involved a significant and
unprecedented decline in economic activity and employment.
The Committee noted that more stimulus is needed to support a medium-term recovery in economic activity, employment, and
inflation. Members noted that the main thing needed to support the economy is fiscal stimulus, given that fiscal policy
is best placed to directly support households and businesses. The role of monetary policy is to support the economy by
ensuring that interest rates remain low, which will complement the effects of fiscal measures.
Members discussed the fiscal assumptions in the economic scenarios. It was noted that the government has publicly
announced that $52 billion has been made available for pandemic recovery packages. This figure is used as the core
fiscal spending assumption in each scenario.
Members agreed that a ‘least regrets’ monetary policy approach is needed, delivering stimulus sooner rather than later,
and thus minimising the risk that the stimulus delivered turns out not to be enough.
The Committee discussed the world economic situation. Members noted the global environment is volatile and uncertain.
Some commodity prices are strong, but many of New Zealand’s trading partners are experiencing economic disruption and
declining activity. Despite pockets of relative strength, conditions in trading partners will be a drag on domestic
activity.
The Committee discussed the balance of risks around the baseline scenario and agreed that the risks are to the downside.
Activity could be lower than expected as a result of containment measures having more severe economic effects than
assumed. Another risk is that the pandemic itself lasts longer or has more severe effects on trading-partner economies
than assumed. There is also uncertainty about the impact of monetary policy actions on the economy.
Members noted some chance that activity could be higher than expected. There is some possibility that trans-Tasman
travel could restart earlier than assumed, or that a return to alert level 1 could happen sooner than expected. Either
of these events would result in spending and employment recovering faster. Another possibility is that supply-chain
disruption leads to relative price shifts for specific consumer products, keeping average inflation higher than
expected. Members agreed that these possibilities were not material enough to shift the overall balance of risks around
the baseline scenario.
The Committee noted evidence on the effects of the Large Scale Asset Purchase (LSAP) programme so far. Members were
pleased to note that both wholesale and retail interest rates have fallen. The functioning of markets has also improved
– a secondary goal of the LSAP programme. Further declines in retail interest rates would be needed to fully deliver the
stimulus. The Committee noted that long-term interest rates in the government bond market are also sensitive to a number
of factors outside the LSAP programme, including bond issuance and foreign bond yields.
The Committee discussed the secondary objectives of monetary policy. Some members expressed concern about financial
stability due to the economic disruption of the pandemic. The Committee noted that the banking system is sound and
markets are functioning satisfactorily. Members agreed that all policy areas – monetary, financial stability, and fiscal
– are mutually reinforcing in this environment, all working to achieve complementary goals.
The Committee discussed the range of monetary policy options. Members noted that there are policy tools available that
have not yet been used. The Committee agreed that it will stand ready to deploy further tools as needed, should the need
for stimulus continue to increase. Tools available include further reductions in the OCR; a term lending facility; and
adding other asset classes, such as foreign assets, to the LSAP programme.
The Committee noted that a negative Official Cash Rate (OCR) will become an option in future, although at present
financial institutions are not yet operationally ready. The current goal of monetary policy tools is to reduce borrowing
rates for New Zealanders, and further OCR reductions at this stage would not be effective in achieving that.
Consequently, the Committee reaffirmed its forward guidance that the OCR will remain at 0.25 percent until early 2021.
It was noted that discussions with financial institutions about preparing for a negative OCR are ongoing.
Members agreed that an expansion to the LSAP programme is the most effective way to deliver further stimulus at this
time. The Committee noted advice that adding inflation-indexed government bonds (IIBs) to the LSAP would improve both
market function and policy effectiveness. The Committee agreed to add IIBs to the LSAP.
The Committee discussed ways to measure how much stimulus is delivered by a given volume of LSAP. It was noted that
while more purchases will deliver more stimulus, it is not easy to translate this directly to an OCR-equivalent measure.
The Committee noted that the size of the LSAP programme needed to be sufficiently large to keep interest rates lower
across the yield curve. Members agreed that the LSAP programme can be scaled as needed in future. Members noted that
additional LSAP purchases are covered by an updated Crown indemnity, which represented a ceiling, not a target, for the
total volume of LSAP.
The Committee reached a consensus to:expand the LSAP programme to purchase up to a maximum of $60b over the next 12 months;delegate to staff the composition and pace of purchases within the LSAP programme, across the eligible asset classes of
NZ Government Bonds, NZ Government Inflation-Indexed Bonds, and Local Government Funding Agency bonds; andhold the OCR at 25 basis points.Attendees
Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha
External: Bob Buckle, Peter Harris, Caroline Saunders
Observer: Caralee McLiesh
Secretary: Gael PriceMore informationAlternative Monetary Policy ToolsMOF/RBNZ Memorandum of Understanding regarding the use of alternative monetary policy tools (PDF 883KB)Letter from the Reserve Bank to the Minister of Finance – May 2020 (PDF 32KB)Letter of Indemnity from the Minister of Finance – May 2020 (PDF 67KB)Download the Monetary Policy Statement May 2020 (PDF 1.85MB)