Reserve Bank plans to print $ 28 billion for “Financing for loans”

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The Reserve Bank will launch a financing program for loans in December, signaling that there would be few conditions on how banks could on-lending the money.

Deputy Governor Christian Hawkesby said the Reserve Bank expected to spend $ 28 billion on the program, if the banks used their full allocations.

The program, confirmed in its monetary policy statement on Wednesday, will see the central bank providing cheap finance to banks for on-lending to their customers in a bid to further cut retail interest rates.

The Reserve Bank confirmed that the official treasury rate will remain at 0.25%, as it pledged, and that its $ 100 billion quantitative easing program will continue.

The bank signaled earlier Wednesday that it may take action to prevent homebuyers from going overboard in debt by reintroduction of loan-to-value (LVR) restrictions on mortgages from March – even as it put its foot on the ground on monetary easing.

The Reserve Bank acknowledged that economic activity had proved “more resilient than previously thought” during its last monetary policy statement in August.

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“This trend was evident across a range of indicators, including employment, household spending, gross domestic product (GDP) and asset prices,” he said.

But he balanced that by saying that the economic shock from Covid-19 was “very large and persistent” and that inflation and employment would remain “below mandate targets for an extended period.”

The outlook for global economic activity remains dependent on the containment of the virus, he said.

ASB's warning comes from Reserve Bank governor Adrian Orr at <a class=economic forum” style=”width:100%;display:inline-block”/>

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ASB’s warning comes from Reserve Bank governor Adrian Orr at economic forum

“While recent news on vaccine developments is positive, there is still a long and uncertain timeframe before a large-scale vaccine deployment can be achieved.

“In the meantime, international border restrictions will continue to restrict international trade and migration, with varying impacts across industries and regions. “

Reducing OCR below zero and purchases of foreign assets financed by the Reserve Bank also remain options, he said.

Banks were on track to be ready by the end of the year to complete the software changes necessary to enable negative OCR, he said, although he is committed to maintaining OCR. unchanged until at least March.

The Reserve Bank had previously declared he could start financing the loans before the end of the year.

He said he was sticking to his intention of not imposing significant conditions on how banks might apply the funding.

Some central banks abroad, such as the European Central Bank, have attached conditions to similar programs to deter banks from using finance to fund mortgages.

But the Reserve Bank said on Wednesday that “targeting the incentives at specific sectors would reduce the effectiveness of the program.”

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Some fear that loan financing will further fuel housing inflation; the reserve bank says it won’t try to target the program to fund certain types of bank loans, but banks will have to meet certain targets to get all the money.

Its monetary policy committee agreed that “targeting credit to specific sectors was the role of the banking sector or government initiatives,” he said.

Hawkesby said the Reserve Bank would lend qualifying banks an amount equivalent to up to 4% of their qualifying loan portfolios, or up to 6% if they meet “specific lending targets.”

“By our measure, that will add up to $ 28 billion if this full allocation is used.”

Both allocations suggest that there may be conditions attached to part of the loan, despite the Reserve Bank’s more general comments on “conditionality”.

“From our perspective, we’re less focused on the size of the program,” said Hawkesby.

“We believe the key element is the impact the program will have on interest rates and how it will give banks the confidence to lower their other funding rates – term deposits and wholesale funding rates. . “

ASB chief economist Nick Tuffley said it looked like the program would be designed to be “large, to encourage lending and to be free from restrictions such as sector-specific goals that might otherwise limit its effectiveness. “.

“These criteria should give it a good chance of being effective, even if the devil will be in the last details,” he said.

The need for further OCR cuts would depend on the effectiveness of the loan financing program in lowering interest rates “and whether the recovery is not hampered by events”, a- he declared.

“Nonetheless, we expect the Reserve Bank to firmly keep the potential of a negative OCR on the table and be ready to use it if necessary.”

Westpac chief economist Dominick Stevens said the Reserve Bank was ready to break its pledge not to reintroduce LVRs until May. raised questions about whether this could cut OCR earlier than expected.

Reserve Bank Governor Adrian Orr gave the bank a word in March to keep OCR at 0.25% for a year and said on Wednesday that the pledge was still in place.

He acknowledged that there could be a “trust” issue as a result of the violation of the LVR promise.

It was “a really difficult decision” because of it, but the banks had contacted him to request the reintroduction of LVRs, he said.

“In terms of disappointing people, it’s not the CEOs of the banks. “

“Inflation in house prices” had not been his concern, he said.

“It is the amount, level and proportion of high risk loans that we are concerned about,” he said, attempting to distinguish between price and the risk of default.

ANZ said it now expects the Reserve Bank to follow its Australian counterpart and cut the OCR to 0.1% in May, and possibly again to -0.25% in August.

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