OCR Preview: All eyes on quantitative easing

Economists say the Reserve Bank will keep the official cash rate on hold next week, but believe it could expand its quantitative easing programme to push down interest rates.

TMM Online's latest OCR Preview Survey shows 100% of economists think the OCR will be kept at 0.25% this week. The RBNZ has stated interest rates will stay on hold until March at the earliest. 

Economists say the Reserve Bank's large scale asset programme could be the key thing to look out for.

The LSAP programme is viewed as the preferred near-term tool to push down interest rates.

Kiwibank's Jarrod Kerr believes the $60 billion bond buying programme could be extended.

"The RBNZ’s LSAP programme has been successful to date," Kerr said. "But the Government has only just begun to expand its balance sheet and bond issuance program. The RBNZ has plenty more bonds to buy. The LSAP program is likely to be lifted from $60 billion towards $100 billion. And we think the program will ultimately end up near $120 billion in coming years."

ANZ economists predict the LSAP programme will be lifted to $90 billion in August.

Negative rates are viewed as another option for the central bank.

As the economic impact of Covid-19 continues to bite, commentators believe we will hear more about the possibility of a negative OCR.  

The Reserve Bank has told lenders to prepare for the possibility of negative rates next year. The issue has divided Kiwi economists.

Brad Olsen of Infometrics believes the RBNZ will eventually opt for negative rates.

"We expect the Reserve Bank will take the OCR negative by mid-2021 once retail banks are able to implement a lower rate," Olsen said. "However, we expect to see the Reserve Bank make it clear publicly ahead of this move, what its preference is between a lower OCR and an expanded LSAP programme, which will provide us with greater direction as to the likelihood of the move."

Kerr said a negative OCR would be a last resort. 

"They cannot justify such a move in the current environment. But if we were to see another Covid-induced lockdown, then negative rates will be looked at more seriously. I believe negative rates are a gamble."

Donal Curtin of Economics NZ is unsure whether the Reserve Bank will go for a negative OCR. He said the reluctance of the Reserve Bank of Australia and US Federal Reserve to pursue negative rates could influence the RBNZ's decision. 

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