The evolving COVID-19 outbreak has unsettled communities around the world, creating uncertainty about the future. New Zealand is no exception. But we start in the best possible relative position.
Our financial system is in good shape, with our trading banks having lots of capital and plenty of cash to help their customers through these testing times.
The Reserve Bank is making sure our financial system works effectively.
We cut the Official Cash Rate from 1 percent to 0.25 percent and committed to keep it there for at least the next year. This record low cost of borrowing will mean more cash in the hands of indebted households and firms to use for essential matters.
We also gave the banks a clear go ahead to use the capital they have stored for rough times. We estimate this gives banks an extra $47 billion of lending capability to assist New Zealanders. They have a similar amount again to lend if needed without reaching their minimum capital reserves. In normal times this is about three years of borrowing demand.
And we are ready to act further, with more firepower in reserve to keep the financial taps turned on.
Our Monetary Policy Committee signalled that Large Scale Asset Purchases of New Zealand Government Bonds can be used when further stimulus is required. This involves the Reserve Bank buying government bond holdings in the secondary market in return for cash, thereby reducing longer-term interest rates which are important for mortgage and business lending.
There are other tools we can use to achieve the same outcome, including providing banks access to longer-term loans for the specific purpose of passing them on to customers, or swapping floating loans for fixed long-term loans – also to ensure long-term interest rates stay where we need them.
It is our expectation that retail banks will use these options to support their customers. We are in constant communication with them and will report how they get on. We are confident banks are very well placed to respond to the impacts of COVID-19.
There will be hard times ahead for some households and firms. Some people will lose their job, some firms will go out of business, while other businesses will thrive over time and new firms will emerge.
The government’s recent fiscal measures including wage subsidies – on top of New Zealand’s already significant welfare system – will support people through this period. This is also why we need our retail banks to focus on the long-term sustainability of their business and the well-being of their customers.
We’ve also made provisions to ensure there is plenty of cash available for people to access all around New Zealand under all conditions. There is no need to stash cash, we do that for you for when you need access to it.
New Zealanders can be assured that the Reserve Bank has their backs, and is committed to do what it takes to support the functioning of the economy in times of uncertainty. Please do listen to the health authorities, be a responsible Kiwi, and look after each other.
Kia maia, kia manawanui
Be strong, be resilient
Kia kaha tatou ki te tiaki i a tatou ano
Let us all look after one another
Author,
Adrian Orr,
Governor of the Reserve Bank
This release was first published in The Sunday Star Times.
