RBNZ holds cash rate & QE steady

Chris Scicluna
Stock rotation continues as investors continue to digest Pfizer vaccine news
Sector rotation remained the dominant theme in the US equity market on Tuesday as investors continued to digest the previous day’s promising Covid-19 vaccine news. While further gains in energy and industrial stocks help drive the DJI to a gain of 0.9%, the S&P500 closed down 0.1% and weakness in technology stocks saw the Nasdaq decline a further 1.4%. USTs weakened a little further, with 10Y yields up to 0.975%.
In a relatively quiet day for local news, markets have been somewhat mixed in the Asia-Pacific region. In Japan the TOPIX increased 1.7%, led by gains in financial stocks as investors continued to digest yesterday’s BoJ policy tweak designed to encourage consolidation amongst regional and shinkin banks. By contrast, stocks fell in China, with the CSI300 down almost 1%, as the index was weighed down by declines in technology as Alibaba’s Singles’ Day sale got underway amid concerns about the intentions of local regulators in the sector.
However, in Australia – where consumer confidence was revealed to have increased to a 7-year high – the ASX200 rose 1.7% and the 10Y ACG cash yield followed yesterday’s moves in USTs, jumping 8bps to a 2-month high of 1.00%, while the 30Y yield flirted with 2.00%. In New Zealand both interest rates and the Kiwi dollar rose sharply – the 10Y bond yield rising 14bps to a more than 3-month high of 0.89% – even after the RBNZ confirmed that it would provide additional stimulus via a programme to lower funding costs for banks. Instead investors reacted to a less downbeat outlook for the Kiwi economy that might suggest less need for further policy easing next year (plenty more on this below).
Looking ahead, given the Veterans’ Day holiday in the US and the Armistice Day holiday in parts of Europe, a quiet day for economic news should be in store with no top-tier data releases due. It is worth noting, however, that while the cash Treasury market is closed, exchanges remain open. Meanwhile, the ECB’s two-day Forum on Central Banking gets underway this afternoon, with President Lagarde kicking off the event with the introductory speech and subsequent panels today to be chaired by Vice President de Guindos (on post-Covid deglobalisation, and macro-financial implications of climate change) and Chief Economist Lane (on inflation objectives, structural forces and central bank communication).
Japan’s machine tool orders show signs of stabilizing in October
According to the JMTBA – which represents Japan’s major manufacturers of machinery tools – the value of orders placed fell 2.1%M/M in October. Even so, the annual declined moderated to 5.9%Y/Y from 15.0%Y/Y previously – the smallest decline reported for two years. All of the improvement in annual growth came from domestic orders, which nevertheless were still down 4.6%M/M and 13.6%Y/Y. Foreign orders edged down 0.7%M/M and 1.1%Y/Y. Further – and more comprehensive – information on machine orders will be available tomorrow when the Cabinet Office releases its survey for September, which will also include firms’ forecasts for orders in Q4. In other news, the BoJ reported that growth in M2 was steady at 9.0%Y/Y in October, while growth in M3 edged up to 7.5%Y/Y.
Australian consumer confidence rises to 7-year high in November
As suggested by the higher-frequency ANZ-Roy Morgan survey, today’s Westpac consumer confidence survey pointed to a further lift in sentiment over the past month. Thanks to a combination of easing coronavirus restrictions, record low interest rate and back-dated tax cuts, the headline confidence index increased 2.5%M/M to a 7-year high of 107.7. In the detail, the largest improvement this month was seen in the indices measuring year-ahead expectations for the economy and attitudes to buying major household items, with the former increasing to its highest level since May last year and the latter increasing to its highest level since August last year. Meanwhile, reflecting the economy’s weakened started point, longer-term expectations about the economic outlook inched up to levels last seen in 2010.
RBNZ leaves OCR/QE unchanged, announces bank funding programme
At the conclusion of its final meeting for this year, the RBNZ’s MPC today announced that the Official Cash Rate (OCR) would remain at 0.25% and that the envelope for the Large Scale Asset Purchase (LSAP) programme would remain at $NZ100bn – decisions that were widely expected. So as the Bank had foreshadowed, the key announcement today concerned the introduction of a new Funding for Lending Programme (FLP). This additional stimulus was provided despite the Bank acknowledging that both the global and domestic economy had proven more resilient than expected – an understatement – with the Bank arguing that inflation and employment was still likely remain below target for a prolonged period despite the improved outlook.
In common with similar programmes implemented in other countries, the FLP aims to lower funding costs for banks and so ultimately for banks’ customers. The FLP will be implemented in early December, with the exact details to be made available over coming weeks. However, the RBNZ has confirmed that lending will be at the prevailing OCR and for a 3 year term (with a floating interest rate). Institutions will have an initial allocation of 4% of their total ‘eligible loans’, with a further 2% provided on a conditional basis. This additional allocation is available on a 50 cents in the dollar basis as banks expand their stock of eligible loans, up to the 2% cap. The operational window for the initial allocation is 18 months, with a further 6 months allowed for banks to access the addition allocation. If drawn in full, the RBNZ estimates that the FLP would amount to around $NZ28bn of funding support. The Bank notes that it is possible that the FLP will only be drawn down in small amounts given banks’ current funding requirements, but it will still be judged as successful if encourages a broad decline in interest rates.
Looking ahead, the minutes from the meeting indicated that most MPC members agreed that risks to the baseline scenario were less skewed to the downside than they had appeared earlier in the year – an observation that triggered some further pricing out of prospects for a negative OCR in 2021. That said, the RBNZ stated that progress has been made on the Bank’s operational ability to deploy a negative OCR, and the Bank’s ‘unconstrained’ model-generated projection for the OCR still dips into negative territory next year, albeit by less than was the case in the Bank’s August projections.
In other news, to further assist banks, earlier in the day the RBNZ announced that it had decided to delay a scheduled increase in the Prudential Capital Buffer by a further year until July 2022. The Bank will reconfirm this timing near the end of 2021, and may make further amendments to the timing if the conditions warrant it. Meanwhile, reflecting the booming housing market, unsurprisingly the RBNZ announced that next month it will consult about re-instating loan-to-value ratio (LVR) restrictions on high-risk lending (i.e. investor lending) with effect from 1 March 2021.

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