Reserve Bank holds OCR at 0.25%

The Reserve Bank has today announced no change to the Official Cash Rate, keeping it at a record low 0.25%.

The central bank did, however, suggest that it remained open to dropping the benchmark interest rate at a later stage, if needed.

The global economic disruption caused by the Covid-19 pandemic was expected to persist and lead to lower economic growth, employment, and inflation in New Zealand and abroad, it said.

"Even if New Zealand successfully contains the spread of disease locally, reduced world activity will mean lower demand for many of New Zealand's exports."

The one silver lining is that this means that New Zealanders will continue to enjoy record low interest rates on their mortgages.

The RBNZ said mortgage rates should fall.

"We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers."

A number of banks announced two-year mortgage rates of under 3% for the first time earlier this month.

The flip side of this is that New Zealanders with deposits in the bank will continue earning lower interest on their savings.

The Reserve Bank also announced it would increase its Quantitative Easing budget from $33 billion to $60 billion to aid the economy.

The central bank said this step was being taken to reduce the cost of borrowing quickly and sharply.

"This is preferable to delivering a smaller amount of stimulus now, only to risk later realising more should have been done."

Quantitative Easing 

What is QE?

Quantitative Easing is a tool that central banks use to inject cash into the economy when other measures - like cutting interest rates - reach their limit.

How does it work?

The Reserve Bank creates the funds to buy government bonds on the secondary market. This puts cash into the financial system. Its role as large-scale buyer puts a cap on government bond yields debt and reassures markets when they are stressed and interest rates spike.

Why now?

The RBNZ has already cut rates as low as it practically can, leaving QE as its preferred next tool.

With trillions of dollars worth of bonds issued to fund stimulus globally, markets were stretched and rates were rising on NZ government bonds.

The central bank has acted now to put downward pressure on those rates and to help cushion the economy and facilitate the issue of more government bonds to get us through the Covid-19 crisis.

How much?

The increase of the limit today to $60 billion over the next 12 months is huge. At more than 10% of NZ's total annual GDP, it is a substantial sum.