RBNZ Pledged to Expand QE and other Stimulus if Needed, as Risk to Outlook Skewed to Downside

As widely anticipated, RBNZ left the OCR unchanged at 0.25%. The size of QE also stays unchanged at NZD60B. Policymakers acknowledged that the spread ofcoronavirus is under control in the country for now. They also saw reasons for being more confident about the economic outlook. Yet, the central bank cautioned about the “significant economic challenges” ahead, and pledged to add more easing if needed.

At the accompanying statement, policymakers were positive about the downgrade of alert level in the country as the spread of coronavirus has been contained “for now”. It is a welcoming news that “relaxation of social restrictions” and “resumption of domestic economic activity” have happened earlier than what were expected in May. However, reiterating the stance in May, RBNZ noted that “the balance of economic risks remains to the downside”.

RBNZ raised concerns about the strength in kiwi twice in the policy statement. The members suggested that “the appreciation of New Zealand’s exchange rate has placed further pressure on export earnings”, and that “the exchange rate has appreciated since the May Statement, dampening the outlook for inflation and reducing returns for New Zealand exports”. As an exports economy, strength in the exchange rate would affect inevitably affect the pace of recovery even after border reopens.

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On the monetary policy outlook, RBNZ pledged to “provide additional stimulus as necessary”. The central bank signaled the willingness to expand QE if required. Meanwhile, it also indicated the commitment to use other monetary policy tools as needed. The members also noted that more details about the outlook of the QE program, as well as alternative monetary policy tools, will be provided in August.