August 13, 2020
Dr Ganesh Nana

Reserve Bank moves to shore up firepower

Latest monetary policy statement adds $40bn to war chest

The Reserve Bank of New Zealand has provided a clear signal that the economic outlook remains uninviting. Its latest “baseline scenario” projects an unemployment rate climbing to 8.1 percent by the end of the year. Further, this jobless rate remains above six percent for the whole of 2021 and 2022.

The Reserve Bank of New Zealand (RBNZ) has provided a clear picture of an economic outlook that is considerably uninviting. The RBNZ’s latest Monetary Policy Statement (MPS) “baseline scenario” projects an unemployment rate climbing to 8.1 percent by the end of the year. Further, this jobless rate remains above six percent for the whole of 2021 and 2022.

Unemployment climbs to 8.1 percent by the end of this year.

The MPS notes the risks to the outlook are weighted on the downside. In laypersons terms this can be translated as: ‘it is more likely to be worse, rather than better’ than the baseline scenario. This point was also reiterated by the RB Governor during the media conference that accompanied the MPS release. The primary reason for the downside risks are undoubtedly the turmoil in other parts of the globe.

As noted in the MPS:
“Recent indicators highlight that the faster return to social norms and a higher proportion of employees working from home has seen output and employment recover sooner than projected in our May Monetary Policy Statement. Recent spending also reflected pent up demand resulting from the lockdown period. However, the severe global economic disruption caused by the pandemic is persisting.”

However, the scenario released as part of yesterday’s MPS announcements, was finalised last week before the move to Level 3 for Auckland and Level 2 for the rest of the country. This no doubt reinforces the downside risks as being considerable.

The revisions to the RBNZ’s baseline scenario from that presented in their May MPS are telling. At first blush, the unemployment picture appears not as bad, with the peak revised down from a previously expected high of nine percent. However, the lengthening of the recovery represents a significant deterioration in the outlook, with a decline to under six percent pushed back nine months.

As to the external trade picture, the RBNZ points out that commodity exports are holding up well despite the turmoil on the international scene. While some softening is expected, the baseline scenario for commodity exports remains relatively positive.

However, the scenario paints a bleak picture for international tourism, export education, and related activities. These are based on the assumption that the country’s borders will fully open from the beginning of 2022.  Consequently, any pickup in the service sector export activity is delayed till then, with a return to pre-COVID-19 levels not achieved till well into 2023.

As a result of the revised outlook, the RBNZ announced an additional injection of $40 billion into its Large Scale Asset Purchase (LSAP) programme. This effectively increases the amount of money and credit available to be pumped into the economy from the previously planned $60 billion for the period to mid-2021, to $100 billion for the period to June 2022.

In addition, the announcement signalled a preference for a “Funding for Lending” programme, where the RBNZ lends directly to retail banks to on-lend to commercial and other borrowers. The Official Cash Rate remains set at 0.25 percent, although the signal of negative interest rates also remains on the cards.

The RBNZ is preparing for a long haul. It needs to play its part in aiming to minimise the inevitable and continued economic disruption we face. It would do well for all businesses, organisations, family, whānau, iwi, and communities to similarly prepare for such a long haul.

It would do well for all businesses, organisations, family, whānau, iwi, and communities to similarly prepare for such a long haul.