Expect to see further downward pressure on bank lending rates in coming weeks

A number of factors suggest that the Reserve Bank is backing away from further cuts in the Official Cash Rate next year, as had been previously foreshadowed. This doesn’t mean that bank lending rates are on hold, rather the Reserve Bank is putting more reliance on another transmission mechanism – the new Funding for Lending Program - in an environment where the economy has rebounded more sharply than expected.

The economy’s rebound has taken most economists by surprise. The housing market in particular is on fire, although the Reserve Bank has been at pains to point out that it is neither their fault, nor their remit. More recently, we have had the news that researchers are honing-in on a vaccine, raising expectations that borders will eventually open-up and disruptions ease.  While the risks remain to the downside, this setting provides the Reserve Bank with the latitude to assess the success of it’s new Funding for Lending Program in lowering bank lending rates, before resorting to cutting the Official Cash Rate and taking it into negative territory.

In this environment, the Reserve Bank appears to be leaning towards this new tool to achieve lower bank lending rates. This has led economists to pare-back their forecasts for further reductions in the Official Cash Rate, while acknowledging the risks are still to the downside, depending on the success of a vaccine, New Zealand remaining Covid free, the path of recovery and the Funding for Lending Programme. 

​Either way, it is the transmission mechanism not the end-result that is at stake here, this is about encouraging banks to pass on funding cost reductions to their lending rates in order for monetary policy to transmit effectively. Specific details of the Funding for Lending Programme are due to be released prior to the launch of the scheme in early December. At this point, we can expect to see further downward pressure on bank lending rates.

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