First scratch: Cheap loans for banks
Reserve Bank plans to print and lend up to $28b direct to banks at near 0% over 2 years; Success to depend on banks passing on low rates, which they haven't since August; No strings on first $18.7b
The Reserve Bank has announced plans to print and lend up to $28b to banks at 0.25% or lower over the next two years in the hope they will pass on the lower funding costs to borrowers, even though they haven’t since August. That would bring the total money printing to almost $130b over three years, with the banks facing no restrictions on whether they pump more loans into boosting prices of existing homes.
The first $18.7b worth of lending over the next 18 months comes without strings attached on whether it should be lent, or to who. The last $9.4b will only be lent if the banks lend two dollars for every one dollar provided by the Reserve Bank, but without direction on where it should be lent.
The bank said its Funding for Lending Programme (FLP) would start from December, with up to 4% of bank lending (currently $468b in total) being lent by the Reserve Bank. Another 2% of lending would be lent with the two-for-one condition.
Governor Adrian Orr told the bank’s November Monetary Policy Statement news conference he expected the banks to pass on the lower funding costs in a “full and wholesome way.”
Earlier, the Reserve Bank had delayed the introduction of higher capital requirements for another year to July 2022 to give them more confidence to lend, at the same time as bringing forward the re-introduction of LVR restrictions to March from May.
The Reserve Bank left its $100b programme of money printing and bond buying unchanged, and said it expected not to run out of bonds to buy, even though the Government’s borrowing requirements are falling in line with a smaller deficit because of a better rebound in the economy.
Orr defended the effects of the bank’s policies on house prices and inequality, saying those matters were Government responsibilities, while the Reserve Bank’s focus was reviving inflation and maximising employment.
The bank’s Monetary Policy Committee said it may have to stimulate even more in the future because inflation expectations were low. It also noted banks has not passed on lower funding costs since August.
“However, members noted that bank lending rates were largely unchanged since August despite the reduction in funding costs. They discussed the importance of banks passing on funding cost reductions to their lending rates in order for monetary policy to transmit effectively.” Reserve Bank Monetary Policy Committee (MPC)
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“Members agreed that, under current circumstances, the appropriate stance to achieve its remit objectives would be to provide further monetary stimulus. They also agreed that providing sufficient monetary stimulus would also promote financial stability, through improved employment and household income prospects. The Committee agreed that, given the current inflation and employment conditions, and the ongoing significant uncertainty with regard to the outlook, there was less regret associated with the risk of temporarily overshooting their policy remit.” Reserve Bank MPC
Ensuring the lower funding costs were passed on would be crucial, the bank said.
“Members noted that the effectiveness of an FLP would depend on financial institutions passing on declines in their funding costs to borrowers, and agreed to monitor pass-through to lending rates closely.”
The bank defended the lack of ‘strings’ attached to the lending, although it was clear in the MPS that bank lending since March had focused on housing lending, and had fallen for businesses. The Bank said the lack of business lending was more about a lack of demand than a lack of bank appetite.
‘The Committee agreed that including an incentive to expand lending would help to ensure adequate supply of credit to support the economic recovery, but that targeting the incentives to specific sectors would reduce the programme’s effectiveness. The Committee noted that overseas initiatives to target sectors of the economy had been designed to overcome specific issues in those countries. The Committee agreed targeting credit to specific sectors was the role of the banking sector or government initiatives.’ MPC
The central bank said it could still introduce negative interest rates early next year if necessary. The Reserve Bank’s own measure of an ‘unconstrained’ OCR envisaged it falling to minus 1.5% by the end of 2021, although most economists expect it would only ever be cut to 0.5%. The unconstrained fall was less than the minus 2.4% trough forecast in August.
‘Members noted that the banking system is on track to be operationally ready for negative interest rates by year end. The Committee agreed that it was prepared to lower the OCR to provide additional stimulus if required.’ MPC
Banks warned to pass it on
“Since the August Statement, bank funding costs have continued to fall, driven by further reductions in term deposit rates. However, this has not yet fully translated to lending rates. We expect recent reductions in bank funding costs to pass through to lower lending rates in the near future.” MPC