FLPing Property Just Got Cheaper. The RBNZ Will Provide Banks With Cheaper Funding.

• The RBNZ left the OCR and the LSAP unchanged. And the MPC made good on the promise to provide banks access to cheaper funding via an FLP.

• The success of the FLP will factor into the RBNZ’s decision on taking their next step, below zero. The FLP will lower lending rates, but lacked any incentive to lend to businesses – as seen in Australia.

• The RBNZ’s actions to date have fuelled the housing market, there is little doubt. Double digit price gains in the midst of the worst recession in 100 years has surprised us all. LVR restrictions will be back in March.

The RBNZ kept the cash rate at 0.25%, and the LSAP was left alone at $100bn. Neither the cash rate nor the LSAP were in play today. The decision centred on the introduction of a funding for lending programme, FLP. And the RBNZ delivered. The FLP will provide banks with a cheaper source of funding and enable banks to pass on lower lending rates to households and businesses. The initial funding allocation of 4% of total bank loans and advances, domestically, will be followed by an additional (and conditional) 2%, for a total available funding pool of 6% per bank. The funding will be available for 3 years on a floating rate (so to capture any cut into negative territory). The FLP will be effectively open for 24 months (18 months on the initial allocation plus 6 months for the additional 2% allocation).

“The Funding for Lending Programme (FLP) aims to lower the cost of borrowing for businesses and households, thereby supporting economic activity and employment, and helping keep prices stable. Through the FLP, the cost of borrowing for New Zealanders will be lowered via three channels: directly through cheaper FLP funding to finance lending by eligible participants; indirectly through a reduction in interest rates on other forms of funding; and by supporting the supply of credit to the economy.”

Since February, we have pounded the table in favour of bank term lending facilities as the next best monetary policy option. Today’s FLP announcement was a well-orchestrated, well-telegraphed, but long-awaited policy move. Late, but in earnest.

Expanding headroom while lowering the ceiling.

Earlier in the day, the RBNZ announced a further delay to the start of the increases in bank capital, until July 2022. The additional 12 months gives “banks continued headroom to respond to the effects of the Covid-19 pandemic and to support the economic recovery.” At the same time, the RBNZ will look to re-instate “loan-to-value (LVR) restrictions on high-risk lending with effect from 1 March 2021”. The LVR ceilings were removed in May, and were meant to be up for review in May 2021 (12 months off). The RB today said “Circumstances in the lending market have since improved and we are now observing rapid growth in higher-risk investor lending. We will consult about re-instating the restrictions we had in place pre-COVID, which limited the amount of high-risk lending that banks could make,” which may mean the LVRs come back on investor lending only. Reinstating the LVRs from March, instead of May, is a slightly more pre-emptive stance. Anyone considering a property purchase may act with a bit more urgency to get it all done before March. And the early reinstatement of the LVRs proves our point that the RBNZ is more than capable of delivering a negative cash rate at its February MPS – just a few weeks ahead of its “12 month” guidance to mid-March 2021. We continue to expect a 75bp cut in February to -0.5%. God help us.

Continuing policy support is still needed, despite the broad improvement in the outlook.

The Reserve Bank’s baseline scenario reflect the strong dependence of our economic recovery on the progression of the pandemic. So long as the virus rages on here and abroad, the outlook for the Kiwi economy remains uncertain. The risks clearly remain to the downside. Inflation remains below the RBNZ’s 2% target midpoint for almost all of the forecast period, reaching the target 2% midpoint in Sep 2023 quarter. The labour market results have held up better than expected despite the decline in economic activity. The unemployment rate peak has been lowered to 6.4% but shifted out to the June quarter 2021. It’s a slow recovery.

“The Committee reaffirmed that an FLP, a lower or negative OCR, purchases of foreign assets, and interest rate swaps remain under consideration.”

There was little in the way of forward guidance around the cash rate. The once useful OCR track only goes out to March next year (rather than the previously useful 2 years), and remains unchanged at 0.3%. The deliberate removal of forward guidance around the cash rate opens the MPC up to moving at any point the see fit, if they see fit, next year.

We remain of the view that the RBNZ will follow through with another cut in the cash rate to -0.5% next year, most likely in February.

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