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UPDATE 1-NZ central bank expands bond-buying, flags negative rates as nation locks down again

12 Aug 2020 / 11:05 H.

    (Recasts, adds details, comment from RBNZ and economist)

    By Praveen Menon and Swati Pandey

    WELLINGTON/SYDNEY, Aug 12 (Reuters) - New Zealand's central bank surprised markets on Wednesday by expanding its bond-buying programme and held out the prospect of negative interest rates in a bid to revive the coronavirus-battered economy as the country was plunged back into lockdown.

    The Reserve Bank of New Zealand left interest rates at an all-time low of 0.25% in a widely expected decision, but expanded its large scale asset purchase (LSAP) programme to as much as NZ$100 billion ($65.39 billion), from NZ$60 billion.

    Flagging policymakers' readiness to step-up support, the RBNZ said it is also actively considering a package of additional monetary tools, including negative interest rates and low-cost funding to banks. The purchase of foreign assets also remain an option.

    "The Bank sent its clearest message yet that negative rates are coming," said Ben Udy of Capital Economics.

    "We still expect the Bank to wait until next year before bringing the OCR into negative territory, though the risk now is that the Bank moves sooner rather than later."

    In response to the central bank's statement, the New Zealand dollar slipped to a one-month low of $0.6524.

    The central bank's dovish outlook comes as New Zealand re-introduced mobility restrictions earlier in the day due to the emergence of a coronavirus cluster after sailing through for more than 100 days without COVID-19 at home.

    The nation's biggest city of Auckland was placed in lockdown from Wednesday following four new cases of locally acquired coronavirus reported overnight.

    "Given the ongoing health uncertainty, there remains a downside risk to our baseline economic scenario," RBNZ said in a post-meeting statement.

    In addition, members agreed the bank should retain the flexibility to adjust the pace and composition of bond purchases.

    "The Committee also agreed that any future move to a lower or negative OCR, if complemented by a Funding for Lending Programme, could provide an effective way to deliver monetary stimulus in addition to the expanded LSAP if needed."

    The RBNZ stunned markets with a 75-basis-point cut in March as the coronavirus surfaced in the country, but has since left it unchanged.

    Recent data had indicated that the economic impact of the pandemic was not as dire as feared, with unemployment rates falling, inflation seen picking up and the housing market being resilient.

    ($1 = 1.5293 New Zealand dollars) (Editing by Shri Navaratnam)

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