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Rates were lifted today in New Zealand as the Reserve Banks tries to tame inflation. But will they break something as pressures on households rise?
https://www.rbnz.govt.nz/news/2022/05/monetary-conditions-tighten-by-more-and-sooner
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The New Zealand Reserve Bank’s Monetary Policy Committee dropped a 50 basis point hike today by lifting the official cash rate to 1.5% from 1% Wednesday in Wellington, the first time it has delivered an increase of that magnitude since 2000, its biggest hike in 22 years.
So the question is, does the 50 basis point hike represent a stitch in time, or a nail in the coffin of the property market?
The move wrong-footed 15 of 20 economists who expected a quarter-point adjustment. However, investors had assigned it a 70% probability.
“The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations,” the RBNZ said. “It is appropriate to continue to tighten monetary conditions at pace.”
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We just got the results of the Reserve Bank New Zealand Stress Tests, and this year the RBNZ undertook both its regular solvency stress test, challenging the resilience of banks’ capital to a severe downturn, and also put the spotlight on banks’ liquidity and funding resilience through a liquidity stress test ahead of next year’s review of the RBNZ’s liquidity policy. The solvency stress test included the five largest banks – ANZ NZ, ASB, BNZ Westpac and Kiwibank – and the liquidity stress test featured those five plus Co-operative Bank, Rabobank NZ, Heartland, SBS and TSB.
https://www.rbnz.govt.nz/news/2021/12/stress-tests-show-strengthening-bank-resilience
Large banks fared worse than the smaller banks. However, banks were able to identify actions that, if effective, would considerably improve the outcome.
Now the banks is at pains to highlight the stress test scenarios are hypothetical and don’t represent its view of the most likely future path for financial stability risks. And the RBNZ doesn’t release individual banks’ stress test results. Unlike the results from the Federal Reserve in the US, where individual banks results are disclosed. In this respect New Zealand is following the opaque strategy APRA also executes, which is a pity. Not least because in New Zealand, Bank Deposit Bail-In is a thing via the Open Banking Resolution, and the RBNZ has warned people to do due diligence on the individual banks – so why don’t they disclose the detail we ask?
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The latest edition of our finance and property news digest with a distinctively Australian flavour.
CONTENTS
0:00 Introduction
1:09 Westpac Says Home Prices Will Grow
3:30 Rising Yields A Risk
7:36 NAB Cuts Mortgage Rates
9:39 NAB;s Troubles Loans
10:40 ME Bank Sold To Bank Of Queensland
13:31 NZ Cash Rate May Rise – Soon
17:22 Conclusions
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We deep dive on recent developments in the NZ property market, as the bubble created by the RBNZ expands, and they react to try to mitigate the risks.
Go to the Walk The World Universe at https://walktheworld.com.au/
The latest edition of our finance and property news digest with a distinctively Australian flavour.
Property Expert Joe Wilkes joins us from New Zealand to discuss the latest turn of events and yesterdays Reserve Bank NZ statement – the clearest articulation yet of what faces us all.
RBNZ Press Conference:
The New Zealand Government, retail banks and the Reserve Bank are today announcing a major financial support package for home owners and businesses affected by the economic impacts of COVID-19.
The package will include a six month principal and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by the economic disruption from COVID-19.
The Government and the banks will implement a $6.25 billion Business Finance Guarantee Scheme for small and medium-sized businesses, to protect jobs and support the economy through this unprecedented time.
“We are acting quickly to get these schemes in place to cushion the impact on New Zealanders and businesses from this global pandemic,” Finance Minister Grant Robertson said.
“These actions between the Government, banks and the Reserve Bank show how we are all uniting against COVID-19. We will get through this if we all continue to work together.
“A six-month mortgage holiday for people whose incomes have been affected by COVID-19 will mean people won’t lose their homes as a result of the economic disruption caused by this virus,” Grant Robertson said.
The specific details of this initiative are being finalised and agreed urgently and banks will make these public in the coming days.
The Reserve Bank has agreed to help banks put this in place with appropriate capital rules. In addition, it has decided to reduce banks ‘core funding ratios’ from 75 percent to 50 percent, further helping banks to make credit available.
We are announcing this now to give people and businesses the certainty that we are doing what we can to cushion the blow of COVID-19.
The Business Finance Guarantee Scheme will provide short-term credit to cushion the financial distress on solvent small and medium-sized firms affected by the COVID-19 crisis.
This scheme leverages the Crown’s financial strength, allowing banks to lend to ease the financial stress on solvent firms affected by the COVID-19 pandemic.
The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum. The loans will be for a maximum of three years and expected to be provided by the banks at competitive, transparent rates.
The Government will carry 80% of the credit risk, with the other 20% to be carried by the banks.
Reserve Bank Governor Adrian Orr, said: “Banks remain well capitalised and liquid. They also remain highly connected to New Zealand’s business sector and almost every household in New Zealand. Their ability to extend credit to firms to bridge the difficult times created by COVID-19 is critical and made more possible with today’s announcements. We will monitor banks’ behaviour over coming months to assess the effectiveness of the risk-sharing scheme.”
The Government, Reserve Bank and the Treasury continue to work on further tailor-made support for larger, more complex businesses, Grant Robertson said.
A further announcement from the Reserve Bank NZ today. They have established a Term Auction Facility to support the markets/banks, FX swap funding, and a $30bn US Swap line from the Fed. They also removed the credit tiers for ESAS account holders. All signs of Central Bank support for the financial plumbing.
New Zealand’s financial system remains sound, with strong capital and liquidity buffers.
Assistant Governor Christian Hawkesby said the Reserve Bank is actively involved in financial markets to ensure smooth market functioning despite the global uncertainty from COVID-19. Regular market operations continue to ensure there is ample liquidity in the financial system.
“The measures we are implementing today provide additional support to domestic financial markets. We will ensure our operations make financial markets operate smoothly,” Mr Hawkesby said.
“We are working in tandem with the banks, the wider financial market community, and the Government.”
The Term Auction Facility (TAF) is a program that will alleviate pressures in funding markets. The TAF gives banks the ability to access term funding, with collateralised loans available out to a term of 12 months.
Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets. The opening of the TAF will provide confidence that the Reserve Bank stands ready to support the market if needed. Further operation details on the TAF are available in a Domestic Markets media release.
The Reserve Bank is providing liquidity in the FX swap market, to ensure this form of funding can be accessed at rates near the Official Cash Rate (OCR). This activity will increase in the weeks ahead to support funding markets.
The Reserve Bank has re-established a temporary USD swap line with the US Federal Reserve. This will support the provision of USD liquidity to the New Zealand market, in an amount up to USD 30 billion. This is a facility that is being offered to many other central banks globally.
The Reserve Bank has been providing liquidity to the New Zealand government bond market to support market functioning.
To support the implementation of monetary policy, the Reserve Bank is removing the allocated credit tiers for Exchange Settlement Account System (ESAS) account holders. This change means that all ESAS credit balances will now be remunerated at the OCR. Under the previous framework, banks were charged a penalty rate on deposits of cash balances above their allocated credit tiers.
The removal of credit tiers for ESAS account holders will provide additional flexibility for the Reserve Bank in its market operations, by keeping short-term interest rates anchored near the OCR regardless of the level of settlement cash in the system. This framework for monetary policy implementation (i.e. a floor system) is common among other central banks overseas.
The Reserve Bank will continue to monitor the use of our liquidity facilities and ESAS settlement accounts. We anticipate that liquidity will continue to be distributed efficiently throughout the banking system. If not, we will review our framework for monetary policy implementation as needed.
The Reserve Bank has a number of tools to provide additional liquidity and the ability to increase the size of operations where needed. We are committed to using these to support smooth market functioning.
In addition to the tools listed above, the Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
Mr Hawkesby reiterated that the Reserve Bank continues to monitor developments, and remains ready to act further to ensure markets and the financial system operate in a stable and efficient manner.
The Reserve Bank of New Zealand, Te Pūtea Matua, is taking proactive steps to ensure it is well positioned to effectively and efficiently manage New Zealand’s monetary policy in an environment of very low interest rates.
In a speech launching its Principles on Using Unconventional Monetary Policy, Reserve Bank Governor Adrian Orr said as kaitiaki (caretakers) of Te Pūtea Matua, the Bank’s activities involve continuous assessment of our monetary policy framework, including the most effective tools and their best application.
Mr Orr said the Reserve Bank has not, and still does not, need to use alternative monetary policy instruments to the OCR, but it is best to be prepared.
“An inability to predict what might happen next is no excuse for not preparing for what could happen. That’s true for businesses, governments and central banks. It is in light of both economic theory and recent global experience that we have been assessing what alternative monetary policy tools may be available to the Reserve Bank of New Zealand – and their relative desirability. We are fortunate, unlike many other OECD economies, to have the time to prepare for such possible needs.”
The Reserve Bank typically implements monetary policy by controlling the Official Cash Rate but as interest rates fall, this tool could be pushed to its limit in the future. Given this, in recent years, the Reserve Bank has been considering the unconventional monetary policy tools and policy framework that it would use to meet its policy targets.
The work to develop the Reserve Bank’s preparation for unconventional monetary policies has involved:
“We are confident of our success in assessment and implementation, but we are also aware that these tools work best when supported by wider stabilisation policies and additional macroprudential considerations. In the event we ever had to use these unconventional tools, our goal would be to ensure a strong and sustained increase in economic activity, with inflation expectations remaining well-anchored on our target mid-point.”
In the coming weeks the Reserve Bank will release a series of technical papers explaining the tools in more detail, examining their pros and cons, and outlining how they would potentially be used.
Note:
The principles and speech do not discuss current economic conditions or the Reserve Bank’s outlook for the Official Cash Rate (OCR). The Reserve Bank’s next OCR decision is scheduled for March 25.
The Bank remains prepared in its business continuity role to ensure a well-functioning financial system, including ongoing consumer and business access to credit and cash, liquidity to the banking system and a stable payments and settlements system.