Tools to support the economy
This page outlines the range of monetary tools we are currently using and some tools we are developing, to control inflation, maximise employment and support economic wellbeing.
Why we need a range of tools
As the Reserve Bank of New Zealand – Te Pūtea Matua, our mandate is to create the conditions that promote full employment and maintain the purchasing power of your money into the future.
The economic downturn caused by the COVID-19 pandemic has made it harder for us to achieve our mandate, with unemployment rising and inflation falling.
In response, we are using a range of tools to lower interest rates and support the economy and jobs by encouraging households and businesses to spend and invest.
Our actions create an environment that supports economic recovery by encouraging households and businesses to spend and invest when they feel more confident to do so.
Without these actions, it is likely the economic downturn would be more severe, leading to higher unemployment and forcing more businesses to close for good.
We have traditionally used the Official Cash Rate (OCR) to control inflation and maximise employment.
The OCR influences the price of borrowing money in New Zealand and provides us with a way of influencing the level of activity and inflation in the economy. The OCR is currently at a record low rate of 0.25 percent.
Read more about the Official Cash Rate
We are now using or considering other tools to lower interest rates to provide extra support for the economy in response to the unprecedented uncertainty and downturn caused by the COVID-19 pandemic.
Our seven-member Monetary Policy Committee makes the final decision on whether other tools are needed, and if so, which ones and when. The committee evaluates each tool against a set of principles to decide which one is best to achieve our inflation and employment mandate.
Read more about the Monetary Policy Committee
Read more about the principles governing our monetary tools
In March 2020, we announced the OCR would remain at 0.25 percent for the next 12 months. This is an example of forward guidance and provides an assurance to households and businesses about the future path of interest rates, giving them some certainty around their spending and investment plans.
Large-scale asset purchases
Large-scale asset purchases (also called Quantitative Easing or QE), involves us buying up to $100 billion of government bonds from banks in exchange for electronically created money. Injecting cash into the economy effectively lowers all other interest rates, including those affecting lending rates for mortgages and businesses.
Lower borrowing costs leaves more money in the pockets of households and extra cashflow for businesses, providing more confidence for them to spend and invest.
In contrast, savers will experience lower returns. The effect on deposit rates is like a fall in the OCR, which happened during the Global Financial Crisis in 2008.
Read more about Large-scale asset purchases
Funding for lending programme
The funding for lending programme (FLP) allows eligible banks to borrow from us at the OCR, which is currently 0.25 percent. The entire programme is worth up to $28 billion.
This programme means banks are less reliant on more expensive deposits and wholesale lending, which lowers their overall funding costs.
In turn, this lets banks pass on the reductions to their customers through lower mortgage and business-lending rates. As banks are also less reliant on funding from savers, it is also likely to lower term deposit rates.
For borrowers, lower interest rates mean there is more money in their pocket to spend on other things. In contrast, savers are likely to see lower returns.
Read more about the Funding for lending programme
Negative Official Cash Rate
Introducing a negative Official Cash Rate (OCR) means we would lower the OCR below zero. With a negative OCR, banks would have to pay to keep their settlement balances with the Reserve Bank, rather than earning interest as they would when the OCR is positive.
Lowering the OCR below zero would work in much the same way as lowering the OCR when it is above zero. It would reduce market interest rates which would then flow through into the wider economy.
This does not mean those with on-call savings accounts or term deposits would have to pay to keep their money in the bank. The negative rates would only apply to banks’ wholesale customers such as other financial firms and large corporates. In other countries with negative policy interest rates, deposit rates for households have generally stayed at or above zero, even as other interest rates have declined. We expect that this would also be the case in New Zealand.
Read more about the Negative Official Cash Rate
Foreign asset purchases
Foreign asset purchases involve selling New Zealand dollars to buy foreign currency or assets.
This would increase the supply of New Zealand dollars and lower the New Zealand dollar exchange rate, which would improve the competitiveness of exporters and raise inflation by making imports more expensive.
Interest rate swaps
An interest rate swap is a contract where one stream of future interest payments is exchanged for another.
We could enter into interest rate swaps to receive fixed rates and pay floating rates to financial market participants. This is the equivalent of ‘putting our money where our mouth is’ and would reinforce forward guidance (see above) to keep interest rates low.
Lower interest rates work through a number of channels – cash-in-hand, investment, asset prices and the exchange rate. The full impact of changes in interest rates on economic activity, employment and inflation typically takes around two years, although the strength and timing of interest rate effects can vary due to factors outside of our control.
For example, uncertainty about the future may cause households and businesses to defer their spending and investment plans despite lower interest rates until they have a clearer picture.
While we cannot compel people to spend and invest, our actions to lower interest rates create an environment that supports economic recovery when they will feel more confident to do so.
Supporting the economy and jobs
We expect the road to recovery for the global economy will be slow and bumpy due to COVID-19.
The best way we can contribute to economic wellbeing is to improve all New Zealanders’ job prospects through lower interest rates.
High and persistent unemployment would be the worst outcome as it would erode economic wellbeing and widen income inequalities.
Improving employment prospects will also support financial stability as those with jobs can repay their mortgage, ensuring banks and the financial system remain strong and resilient.
Raising prices for houses and other assets
Reducing interest rates and making it cheaper to borrow and spend money can push up the price of assets like houses. It can also increase the share prices of equities held by the three million New Zealanders in their KiwiSaver accounts.
Higher house and share prices make people feel wealthier, encouraging them to spend and invest. While this can help us meet our core mandate – controlling inflation, maximising employment and supporting economic wellbeing – higher house prices affect housing affordability.
Lower interest rates, however, are not the only factors influencing house prices. For example, the high number of returning New Zealanders and a historic shortage of houses have also pushed up prices.
Lower deposit and lending rates
Interest rates are a blunt but effective tool to achieve our goal of full employment and low and stable inflation.
By lowering interest rates to support the economy, borrowers will benefit from lower interest payments. In contrast, savers like those who rely on income from term deposits will see lower returns.
The overall impact on savers, however, is complex. Those who have a KiwiSaver account are currently benefiting from higher asset prices.
- RBNZ monetary policy tools media briefing slides 8 Oct 2020 (PDF 500KB)
- Readiness and preparation for negative interest rates (PDF 100KB)
- Letter of 29 January 2020 to banks on readiness for negative interest rates and responses (550KB)
- Letter to banks regarding negative interest rates - 7 May 2020 (PDF 498KB)