Official Cash Rate held at 0.25 percent

The Official Cash Rate (OCR) will remain at 0.25 percent, the Reserve Bank has announced.

In a statement released on Wednesday, Reserve Bank Governor Adrian Orr said that Official Cash Rate was to be held at the current level. 

"The Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March," Orr said in a statement.

"The Monetary Policy Committee is prepared to use additional monetary policy tools if and when needed, including reducing the OCR further, adding other types of assets to the LSAP programme, and providing fixed term loans to banks."  

The Reserve Bank monetary policy committee also announced it would expand the large scale asset purchase (LSAP) programme to up to $60 billion, a significant increase to the previous limit of $33 billion.

"The expansion to the LSAP programme aims to continue to reduce the cost of borrowing quickly and sharply.

"This is preferable to delivering a smaller amount of stimulus now, only to risk later realising more should have been done," the statement said.

Retail interest rates were expected to fall further as lower wholesale borrowing costs were passed to customers, reducing the cost of borrowing.

"It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme."

The Reserve Bank noted that economic activity had deteriorated: local activity had fallen sharply and inflation and employment were tracking below the central bank's objectives, a trend expected for several years.

However, the COVID-19 pandemic and restrictions on movement of people are 'unchartered territory' and it's uncertain whether containment measures are effective.  

Three scenarios were discussed, which all involved unprecedented decline in economic activity and employment. However, it agreed that the situation is too uncertain to allow any one scenario to be treated as a central projection.

More fiscal stimulus was needed to help economic recovery in the medium-term, including local activity, employment, and inflation. The Government's $52 billion COVID-19 relief package was used as a core fiscal spending assumption.

"The Committee discussed the balance of risks around the baseline scenario and agreed that the risks are to the downside.

"Activity could be lower than expected as a result of containment measures having more severe economic effects than assumed," the statement said.

The central bank didn't rule out future cuts to the OCR, including the possibility of the rate dropping below zero. However, as indicated in March, the OCR would remain at 0.25 percent until early 2021.

"A negative Official Cash Rate (OCR) will become an option in future, although at present financial institutions are not yet operationally ready. 

"The current goal of monetary policy tools is to reduce borrowing rates for New Zealanders, and further OCR reductions at this stage would not be effective in achieving that," the statement said.

Ahead of the decision, Kiwibank chief economist Jarrod Kerr told Newshub that the Reserve Bank's Large Scale Asset Purchase (LSAP) programme had been very effective to-date and believed it would be ramped up as a monetary policy tool.

"We've seen the trading in Government bonds improve's also giving the Government confidence that they can increase their debt and have a backstop buyer, meaning the price of their debt isn't going to skyrocket," Kerr said.

"We see the LSAP going from $30 billion on Government bonds to at least $50 billion: that absorbs a lot of the increase in the issuance that will be required following what's announced in the Budget [on Thursday]."

He said that although negative rates weren't in the bank's forecast, there's a "very uncomfortable chance" that lockdowns - and possible future lockdowns - could cause more damage than currently realised. 

"We're saying there's a 40 percent chance that they [go negative]," Kerr added. 

Wednesday's announcement follows the Reserve Bank's decision to deliver an emergency 75 basis point cut on March 16, reducing the OCR from 1 percent to 0.25 percent.

Prior to March, the OCR was cut by 50 basis points on August 7, 2019, and was left unchanged in subsequent Reserve Bank reviews in September, November and February.