The Reserve said it would almost double its bond-buying programme to $60 billion to help stimulate the economy as it goes through a Covid-19 driven downturn.

As expected, the bank kept its official cash rate unchanged at 0.25 per cent.

The bank's previous bond-buying, or quantitative easing (QE), limit had been set at $30 billion of Government bonds and $3 billion of local authority paper.

In today's announcement, the programme has been expanded to include New Zealand Government inflation-indexed bonds.


While no mention of negative interest rates was made, the bank's Monetary
Policy Committee said it was prepared to use additional monetary policy tools "if and when needed", including reducing the OCR further, adding other types of assets to the QE programme, and providing fixed-term loans to banks.

The New Zealand dollar rose from US60.68c just before the 2 pm announcement to US60.95c just after.

"The global economic disruption caused by the COVID-19 pandemic is expected to persist and lead to lower economic growth, employment, and inflation both in New Zealand and abroad," the bank said in a statement.

"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," it said.

The bank noted that the main support for the economy was being provided through increased fiscal spending.

"However, monetary policy will continue to provide significant support through keeping interest rates low for the foreseeable future," it said.

The balance of economic risks "remained to the downside".

The expansion of the bank's QE programme aimed to continue to reduce the cost of borrowing "quickly and sharply".


The Reserve Bank has already been active in the bond market, buying $450m worth today alone.

The Government's budget, due tomorrow, is expected to lay out a plan of fiscal stimulus, funded through the bond market. Market expectations are for a $45 billion bond tender programme for the 2020/21 fiscal year.

The RBNZ says mortgage rates should fall.

"We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers," the bank said in today's statement.

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

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


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

Quantitative Easing (QE) Q&A:

What is QE?

Quantitative easing (QE) 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 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 RBNZ 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 crisis.