WELLINGTON – New Zealand’s central bank is expected this week to announce plans to unleash a torrent of cheap money into the financial system – and reiterate possible negative interest rates early next year – as it braces for further consequences of the COVID-19 pandemic.
But on the country’s roads, almost no masks are visible, shops and bars are full of life and New Zealand agricultural export containers continue to be loaded on ships bound for export markets.
New Zealand’s success in keeping the coronavirus away from the community in recent months is reflected in growing business confidence and strong retail activity. Housing prices and shares are at record levels. There are many reasons to be concerned about the global outlook and its impact on the country, but questions are being raised about the Reserve Bank of New Zealand’s planned signal to turn negative.
“If I look at economic data like now, I scratch my head about why the Reserve Bank will mark a continuation of the same line that was launched in August,” said independent economist Cameron Bagrie. “I wouldn’t say the economy is on a firmer footing but it is definitely performing a lot better in the near term than most people think.”
Part of the reason New Zealand’s economy beat expectations is the swift action taken by the central bank and government since March to counter the early effects of the pandemic. The government said it would spend up to 50 billion New Zealand dollars ($ 33.5 billion) to support the economy, while the Reserve Bank of New Zealand introduced quantitative easing through a plan to buy up to NZ $ 100 billion in government bonds.
The Reserve Bank has indicated that its next monetary policy statement, due for release on Wednesday, will include the announcement of the Funding Program for Loans, or FLP. It will be designed to keep interest rates down by providing cheap funds to state banks to lend to customers.
It has been argued that cutting its main interest rate, the overnight cash rate (OCR), from the current record low of 0.25% to below 0 is potentially feasible. However, so far the bank has also maintained its guideline that the OCR will be maintained at 0.25% through March next year.
Economists from the country’s four major retail banks have predicted a possible rate cut of between 50 and 75 basis points in April. Despite a brighter-than-anticipated economic picture, they are sticking with their projections for now, although some admit this is becoming less certain.
“Acting quickly with fiscal and monetary policy is really the right approach, but the response will now be even more complex,” said ANZ chief economist Sharon Zollner. “Policymakers still have to take into account the weak outlook and the enormous downside risks, but ad infinite stimulus is not worth it.”
New Zealand’s economy shrank by 12.2% quarter-on-quarter in the three months to June, half of which was under a tight lockdown that resulted in most retail and hospitality businesses shutting down and people working from home.
Despite a minor outbreak in Auckland in August and the return of some of the lockdown restrictions, the economy has bounced back well. Big bank economists had expected growth of 8.5% to 13.5% in the September quarter, although they warned that the gloomy global outlook would be a drag in New Zealand.
“The recovery in New Zealand’s economic activity looks uneven and risks to the economy are still skewing to the downside,” said ASB chief economist Nick Tuffley.
The central bank’s mandate is to keep inflation between 1% and 3% in the medium term and to support maximum sustainable employment. Inflation fell to 1.4% from a year earlier in the September quarter, while the unemployment rate rose to 5.3% in the same period from 4% in the previous three months.
The government has forecast a peak unemployment of 7.7% next year and New Zealand’s economy will continue to be hampered by continued closure of borders to overseas tourists, the biggest source of foreign income.
Reserve Bank Governor Adrian Orr has repeatedly said the bank will follow a “least regrettable” monetary policy.
“We decided that it was better to risk doing too much too soon, rather than too late,” Orr said earlier this year.
Others, however, question the possible effectiveness of negative rates, given the mixed views on such policies in Japan, Sweden and the European Union in recent years.
One negative side effect in Sweden is a spike in house prices – already a major concern in New Zealand, where prices are up 11.1% on the year to record levels in September.
There are also some doubts about the effectiveness of negative interest rates in spurring business investment and consumer spending amid the uncertain economic outlook.
“When you lower interest rates, you tell people to spend more and save less, but we’ve actually seen the opposite,” said Bagrie. “We saw people hoarding cash on bank deposits.”