Three tools have not yet been used in NZ, but remain under consideration
The Reserve Bank of New Zealand (RBNZ) has released a report detailing the new tools added to its policy toolkit and how they work.
In 2020, the RBNZ developed and introduced additional monetary policy (AMP) tools to help the economy remain resilient during the COVID-19 pandemic. Like official cash rate (OCR) changes, AMP tools work by changing the interest rates faced by borrowers and savers to influence aggregate demand, inflation, and employment. In addition, they can be used when the OCR faces operational or effectiveness constraints.
The latest report about the ramped-up toolkit, RBNZ’s Additional Monetary Policy toolkit (RAMPed up), details the new tools added to the policy toolkit in the past year and how they work:
- “Forward guidance” to keep the OCR at 0.25% for a year;
- The Large Scale Asset Purchase (LSAP) programme to buy government bonds to lower longer-term interest rates. Additional purchases under this programme are currently on hold as of July 23; and
- The Funding for Lending (FLP) to help banks borrow at a low cost to support their customers.
In June 2021, the Finance Minister and the RBNZ agreed to update their shared Memorandum of Understanding (MoU) on macro-prudential policy and add debt serviceability restrictions to the central bank’s toolkit on the condition that any implementation aims to avoid impact to first-home buyers (FHBs) as much as possible.
Read more: Reserve Bank determines gaps on house price growth forecasts
The LSAP programme, term lending programmes, and forward guidance have already been used in New Zealand.
However, in the July 2021 Monetary Policy Review, the Monetary Policy Committee MPC) decided to reduce the level of monetary stimulus because the New Zealand economy had recovered from the impacts of the pandemic – with the additional asset purchases under the LSAP programme being the first to go.
Now, the RBNZ has confirmed that three tools have not yet been used in the country but remain under consideration:
- Negative Interest Rate Policy (NIRP): It refers to cutting the OCR below 0%. It’s not a different tool from the conventional OCR tool, but it has different characteristics to make it useful to consider uniquely. The RBNZ has considered this tool operationally ready since its February 2021 Monetary Policy Statement.
- Transacting Interest Rate Swaps (TIRS): They are derivative contracts used by banks to manage interest rate risk. “Swap rates” are an important benchmark for the setting of fixed-term lending rates. The RBNZ aims to transact interest rate swaps to reduce swap rates at various maturities, which should transmit to lower interest costs for households and businesses.
- Purchases of Foreign Assets (PFA): This is the purchase of foreign currency assets to reduce the NZD exchange rate and, if desired, increase NZD liquidity.
The RBNZ expects all AMP tools to transmit through the banking sector, financial markets, exchange rate channel, and inflation expectation channel.
