At 0300BST/2200EDT overnight, the RBNZ will release the result of their latest monetary policy decision.
Like the majority of major global central banks, the RBNZ’s response to the Covid-19 outbreak was an aggressive easing of policy measures. Rates were quickly axed to 0.25% (record lows), and a new $30bln QE programme was announced (considering the size of New Zealand’s economy and amount of outstanding government debt, $30bln is a lot!).
However, policymakers have sounded much more dovish than at other central banks on two other key issues;
1) The RBNZ has thus far refused to take the option of negative rates off the table (unlike the Fed, RBA, or BoE). However, at the March meeting, the RBNZ said that it would keep rates at present levels for at least 12 months. Therefore, most analysts agree that a cut into negative territory won’t come as soon as this meeting. Many predict negative rates will come either later in the year, or as soon as the RBNZ’s self-imposed 12 month holding period ends in March 2021.
2) They have openly contemplated direct debt monetization. This where the central bank lends directly to the government, rather than the government having to lend out to investors and ordinary banks. Theoretically, direct central bank lending to the government risks sparking uncontrollable government spending, runaway inflation and a slump in bonds and the currency. This is why the topic has been generally taboo over the last few decades. However, the RBNZ has refused to rule out this option. The bank is likely worried about the rate at which foreign investors have been cutting back their exposure to New Zealand debt in recent years. Afterall, the % of foreign ownership of New Zealand debt fell to under 50% last month (it was around 70% in 2015). In other words, if foreign investors won’t buy New Zealand’s debt, maybe the RBNZ will.
In terms of the reaction, as ever the more dovish the RBNZ comes across, the more NZD will be pressured. For example, if the RBNZ does a rate cut, big QE increase, and signals negative rates to come plus potential debt monetization, this will be a HUGE NZD negative. Conversely, if they underwhelm (by potentially not increasing QE enough or going back on what they said before and ruling out negative rates), this will be NZD bullish.
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