QE the preferred tool for lower rates: economists

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Wednesday 24 June 2020

Nick Tuffley

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Economists say the Reserve Bank views its LSAP programme as the best way of pushing down interest rates, despite talk of a negative OCR in recent months. 

The Reserve Bank kept the official cash rate at a record low of 0.25% today, and once again signalled its Large Scale Asset Purchase programme (LSAP) would be its preferred way of lowering borrowing costs. 

The central bank said the LSAP programme could be increased, while it would also consider other tools, such as a lending facility for banks, and foreign asset purchases, as well as a lower OCR.

Economists believe the $60 billion LSAP quantitative easing programme could be increased further to push down mortgage rates.

"That has been our thinking all along," said Kiwibank chief economist Jarrod Kerr. "They haven't finished with LSAP yet, far from it. We think it could double to $120 billion, and we think we will get something towards that in August." 

Kerr argues a lending facility for banks "is probably the most effective" in pushing down interest rates: "It would have an immediate effect, and I think it would come in before a sensible discussion around negative rates, which I think would be a mistake."

ASB's Nick Tuffley said there was no shift from the RBNZ today as the results from its interventions so far were "reasonably encouraging".

Tuffley said the central bank was "yet to pull any particular tools out at this point", "but the direct lending to banks is another obvious step if the capacity for asset purchases was exhausted or they were losing their impact". 

Tuffley believes an expansion of LSAP is more likely "later this year, or early next year". 

Meanwhile, Westpac's Dominick Stephens said today's announcement was notable for its consistent message with previous statements. 

"They haven't changed anything, other than acknowledge the recent data was less bad than expected."

Stephens added: "Previously, the Reserve Bank had decided its tool of choice was LSAP, and it was its first port of call for delivering monetary stimulus."

While the central bank has signalled its preference to stick with LSAP as its main tool, some economists believe its interventions have been "insufficient" so far.

Michael Reddell said: "They continue to talk up the LSAP programme, even as effective monetary conditions, the exchange rate and real interest rates, have barely eased at all this year. Even as we've endured a severe adverse domestic and global economic shock and, as [the] MPC rightly notes, the risks are still to the downside."

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