Coronavirus: Reserve Bank announces injection of cash in financial markets

NZ currency.
The Reserve Bank has announced several tools to inject cash into local markets. Photo credit: Getty.

The Reserve Bank has announced it will implement several tools to boost cash supply to support markets during the outbreak of COVID-19.

The tools will give retail banks access to extra capital, support investment and trading in foreign exchange and government bonds.

Confirming that New Zealand's financial system remains sound, Reserve Bank assistant Governor Christian Hawkesby, said that the extra liquidity will help to ensure that markets run smoothly.

 "We are working in tandem with the banks, the wider financial market community, and the Government," Hawkesby said.

Designed to ease funding pressures, a new 'Term Auction Facility' (TAF) programme will support retail banks in their daily functions, giving them confidence of further support if needed.

"The TAF gives banks the ability to access term funding, with collateralised loans available out to a term of 12 months," Hawkesby said.

To allow it more flexibility, it will also remove credit tiers for Exchange Settlement Account System (ESAS) account holders. Credit balances will now be paid at the OCR rate.

"Under the previous framework, banks were charged a penalty rate on deposits of cash balances above their allocated credit tiers," Hawkesby explained.

"...[This will keep] short-term interest rates anchored near the OCR, regardless of the level of settlement cash in the system."

Following agreement with the US Federal Reserve, the central bank is supporting local US investment through a short-term US dollar swap line.

"This will support the provision of USD liquidity to the New Zealand market, in an amount up to USD$30b," Hawkesby said.  

In the coming weeks, the central bank will also pour an increasing amount of cash into the foreign exchange swap and government bond markets. 

"The Reserve Bank is providing liquidity in the FX swap market, to ensure this form of funding can be accessed at rates near the Official Cash Rate (OCR)," Hawkesby added.  

The central bank will continue to monitor market liquidity and its review of monetary policy will be ongoing. 

"[The Reserve Bank] remains ready to act further to ensure markets and the financial system operate in a stable and efficient manner," Hawkesby said.