The FLP has worked broadly as intended and as expected, spokesman says
The Reserve Bank’s (RBNZ) controversial Funding for Lending Programme will operate until its scheduled end in December, as it continues to work largely as planned.
This was the central bank’s response when asked by interest.co.nz whether the FLP could be ended early given it was introduced as a tool to stimulate an economy that’s now running its highest inflation in 32 years at 7.3%.
Introduced in December 2020, the FLP aimed 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.
As of July 25, banks had borrowed $12.66 billion of the public money priced at the OCR, with ASB leading the pack with $3.8 billion.
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“The FLP is scheduled to end in December 2022,” an RBNZ spokesman told interest.co.nz. “The commitment to the FLP is important to ensure this tool remains credible for future use if required. The drawdown window for the initial allocation of the FLP closed in June 2022. This allocation was roughly two-thirds utilised and any unutilised portion is no longer available. The additional allocation remains open until December 2022.”
According to the RBNZ spokesman, the FLP has worked broadly as intended and as expected.
“We can best observe this by considering the spread between household/business lending rates and wholesale interest rates, i.e. swap rates,” he told interest.co.nz. “Household and business lending rates have been increasing recently, consistent with the tightening of monetary policy; however, the spread between these rates and wholesale interest rates is still low, relative to most of the post-Global Financial Crisis period. This is partially, but not entirely, due to FLP. Ample domestic and global liquidity, as a consequence of monetary and fiscal stimulus measures in New Zealand and abroad, has also provided a mostly accommodative funding environment for banks, and other users of capital markets, in the past 18 months.”
Under the FLP, banks borrow at the OCR, which has increased to the current 2.5% from 0.25% when the fund was launched. RBNZ said the FLP was only a small part of total bank funding, at a maximum of 6%.
“It is also considered in the [RBNZ] Monetary Policy Committee’s decision as to the overall stance of monetary policy, which is calibrated using the OCR,” the RBNZ spokesperson told interest.co.nz. “In other words, the small amount of stimulus being provided by the FLP can be counteracted by the OCR. This might mean that the OCR is marginally higher than it otherwise would be but is not a barrier to the Monetary Policy Committee influencing overall financial conditions in pursuit of its remit.”
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He said, “the continued existence of the FLP does not mean that household and business borrowing rates are higher or lower than they otherwise would be.”
“In the absence of the FLP, in the current environment, we might expect to see marginally lower wholesale interest rates – but higher spreads between wholesale and retail interest rates,” the RBNZ spokesperson told interest.co.nz. “In other words, financial conditions for households and businesses would be essentially the same.”
