RBNZ Preview: Cautiously Optimistic about Recovery while Pledges to Do More if Needed

RBNZ is likely to leave the OCR unchanged record low of 0.25% in June. Meanwhile, the size of the LSAP program (QE) will also stay at NZD 60B. Control of the coronavirus pandemic in the country has been more effective than previously anticipated. Policymakers will be more optimistic about domestic economic recovery than last month. However, as the second wave of outbreak is looming and New Zealand’s border remains largely closed, the central bank will remain vigilant and pledge to act more if needed.

Earlier in the month, the country has moved to alert level 1 from level 2. This suggests that social distancing is no longer required and there is no more limit on gatherings. However, the border remains closed to non-New Zealanders. Back in May, RBNZ’s base and most upbeat scenario suggests that the country will stay in level 2 lockdown for 10 months. Yet, level 2 only lasted for 18 days before moving to level 1. It is estimated that 5% more of economic activities can be resumed after the downgrade of the alert level. It is an encouraging sign and economic contraction in 1H20 will likely be less severe than RBNZ’s previous forecasts.

Despite the good news, RBNZ will refrain from adopting a hawkish tone so as not to lift the exchange rate and yields. We expect it to maintain the forward guidance that it will “use additional monetary policy tools if and when needed, including reducing the OCR further, adding other types of assets to the LSAP program, and providing fixed term loans to banks”.

Unlike RBA which has dismissed the possibility of negative interest rate, RBNZ has not ruled out this option. At an interview with CNN, Governor Adrian Orr affirmed that the central bank still has tools to depressed yields and stimulate the economy. He again noted that negative interest rate remains on the table. On QE, RBNZ’s balance sheet has been increased to NZD 51B by the end of May. The limit of asset buying will be exhausted in 3Q20 if the current pace is maintained. While we do not expect any announcement of QE expansion this month, there might be one in the next meeting.