Reserve Bank funding for lending programme could support lending to SMEs - economist

NZ folded dollar bills
The Reserve Bank funding for lending programme (FLP) would provide a cheap pool of funding for banks to lend. Photo credit: Getty.

A bank funding for lending programme, expected to be confirmed this week, could lower borrowing costs for small businesses as well as homeowners, a leading economist says.

Ahead of the Reserve Bank monetary policy statement (MPS) on Wednesday, economists expect a new funding for lending (FLP) programme to be the main focus. The idea behind the programme is to provide a cheap pool of funding for banks to lend. Reducing banks' reliance on deposits and wholesale funding would allow them to offer lower retail interest rates to borrowers, including households and businesses.

On Monday, fixed mortgage rates start from 2.49 percent (1.99 percent for Heartland Bank). ASB chief economist Nick Tuffley, said current borrowing rates already factor in an OCR of -0.2 percent by late 2021. Overall, he expects the impact of the FLP programme on retail interest rates to be gradual - but doesn't rule out an "announcement effect".

"As the impact depends on banks cutting term deposit rates over time and/or shifting [their] funding mix to heavily weight on FLP funding, we expect that any impact on bank funding costs would come through gradually," Tuffley said.

But Tuffley thinks details of the programme, such as volume or interest rate, could be geared towards supporting bank lending to specific sectors, such as small-to-medium-sized businesses (SMEs). 

"It is possible the RBNZ ties some parts of the FLP to SME lending outcomes… in general net credit to businesses is contracting, though the cause seems to be mainly/wholly a lack of appetite to borrow while considerable uncertainty remains," Tuffley added.

Although the economy including unemployment is tracking better than many expected, economists still predict the cash rate to go negative next year. 

ASB expects a 75 basis point cut in April, to -0.5 percent, but says the extent and timing will depend on how the local economy and global COVID-19 cases, are tracking. 

Similarly, ANZ expects a 50 basis point cut in April, to -0.25 percent. 

"[The FLP] will be directly aimed at lowering retail interest rates, whereas the LSAP has had more of a wholesale impact. We expect that mortgage and deposit rates will move lower and that will be the programme’s measure of success, but how much they will move is uncertain," ANZ senior economist Elizabeth Kendall said.  

Despite already record-low interest rates and removal of loan-to-value-ratio (LVR) restrictions contributing to an overheated housing market, ASB expects the Reserve Bank to leave detailed commentary until the Financial Stability Report on November 25. 

In March, the Reserve Bank signalled that the Official Cash Rate (OCR) would stay at the current level of 0.25 percent for 12 months. In August, the limit of the large scale asset purchase (LSAP) programme was increased to $100 billion, in the aim of lowering wholesale borrowing costs for households and businesses.

In its last review on September 29, the Reserve Bank said it was clear more stimulus was needed. Among these were a negative OCR and a bank funding for lending (FLP) programme, which could be rolled out separately. It said the FLP programme would be ready by the end of the year.

The Reserve Bank will make a monetary policy statement (MPS) on Wednesday.