Other central banks, including RBNZ, have followed suit
The Federal Reserve in the US cut its interest rate to zero on Sunday, a move described by the Washington Post as a “dramatic step” to boost US households and businesses as the coronavirus outbreak brings the economy to a grinding halt.
This brings the benchmark US interest rate down to a range of 0 to 0.25%, down from a range of 1 to 1.25% - effectively bringing it to zero. It is expected that other central banks globally will follow suit, with the Reserve Bank of New Zealand making its own emergency OCR cut to 0.25% yesterday.
The Federal Reserve has also begun “quantitative easing,” something the central bank did following the Great Recession to try and get money moving again in the markets and the broader economy. It has pledged to “use its full range to tools to support the economy and the smooth functioning of markets.”
As part of the process it will buy $700 billion in bonds, at least $500 billion of which will be US Treasury bonds, and the rest will be mortgage-backed securities. The low interest rates are set to stay until the economy has recovered from its downturn.
The US has seen layoffs across the country as businesses struggle to stay afloat and Dow Jones saw “the swiftest 20% plunge in US stock market history,” and firmly remains in bear market territory. The Federal Reserve has also extended US dollar swap lines to several key nations, a move which the Washington Post says is “straight out of the Fed’s 2008 emergency playbook.”
The Reserve Bank of New Zealand has assured that New Zealand’s financial system “remains sound,” and that its main banks are “well capitalised and liquid.”
It has said that it will also initiate a programme of purchasing New Zealand government bonds should further stimulus be required, rather than reduce the OCR further. It says its commitment to 12 months with a 0.25% OCR should “provide clarity to financial markets participants” that we shouldn’t expect a negative OCR over this period.
