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Assuming the official cash rate turns negative, banks will be able to pay back to the Reserve Bank less than what they borrow through their Loan Financing scheme.
The Reserve Bank has signaled that it plans to effectively pay banks to lend newly created money next year, assuming the official cash rate falls below zero, as all banks now forecast.
Assistant Governor Christian Hawkesby said the Reserve Bank could provide more information on its very strong Loan Financing scheme when it releases its next monetary policy statement in November or March.
“But that doesn’t necessarily mean we will pitch the next day,” he said.
The scheme is expected to see the Reserve Bank offer banks tens of billions of dollars in loans, to lend to their borrowers, in an attempt to lower retail interest rates and protect the economy from the impacts of Covid.
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Hawkesby said the Reserve Bank assumed it would lend money to banks at roughly the same interest rate as the official cash rate, which is currently 0.25 percent.
“On that basis, you could assume that if we had a negative rate, we would also be providing financing at a negative rate. [rate] through Financing for loans, ”he said.
Ross Giblin / Stuff
Comments from Deputy Reserve Bank Governor Christian Hawkesby suggest that most funds provided to banks will have few or no strings attached.
Banks expect the Reserve Bank to lower the official cash rate below zero in March or April.
The European Central Bank has loaned almost 1.5 trillion euros (NZ $ 2.7 trillion) to European banks at interest rates below zero this year under a similar scheme.
To some extent, it has kept banks from using the funds to back residential home loans and made them cheaper for businesses.
But there are strong indications that the Reserve Bank won’t go very far down that road.
Hawkesby said the Reserve Bank was still working on the design of its scheme.
But he said he had gotten the message that it should be simple, with few strings attached to the bank loans it helped finance.
“To be effective in reducing financing costs, you need a decent amount that has no ‘conditionality’ attached to it,” he said.
A largely untethered Loan Financing scheme could fuel concerns that the Reserve Bank’s monetary policy is indirectly contributing to higher house prices and other asset price inflation.
But Chief Economist Yuong Ha did not apologize for his stance.
“We recognize that asset prices will go up and house prices are key.”
But KiwiSaver accounts were also a big part of the wealth of many New Zealanders and could be increased as well, he suggested.
“That is one of the channels through which monetary policy works.
“Interest rates are low, asset prices are rising, wealth is rising, trust is supported, and the logical conclusion is that people are spending more, that’s what the economy supports.”
