Banks could be encouraged to lend more to businesses to take some heat out of the housing market under the criteria of a new direct to bank lending programme expected to be revealed by the Reserve Bank this week, economists predict.
The central bank is expected to announce details of its new Funding for Lending Programme (FLP) at its monetary policy statement on Wednesday.
The official cash rate is widely expected to be kept on hold at 0.25 per cent where it was cut to on March 15 as the world faced the global Covid-19 pandemic.
But as concerns of the hot housing market remain high, the Reserve Bank is expected to target the FLP to encourage lending to business and small to medium enterprises.
Mark Smith, senior economist at ASB, said the major focus of the monetary policy statement would be on what the Reserve Bank announces for its Fund for Lending Programme.
"By offering banks stable and cheap lending (at or near the policy rate), the intent of the policy would be to lower bank customer interest rates and to provide additional stimulus to the economy."
Smith said the size and design of the programme would have a key bearing on its take-up and effectiveness.
"We expect the FLP to be operational before the end of the year, to be sizeable (in the region of $30 billion), longer-term (3-5 years), offer attractive rates to banks (possibly a
floating rate capped at current OCR) and to offer sweeteners to entice more take-up for business/SME lending."
But he said the true test would be what the programme did to lending rates and credit growth.
"Beyond an initial announcement-type fall in bank lending interest rates, we expect the FLP will only have a modestly stimulatory impact on the economy and not the big bang some would have hoped for."
Smith said the impacts could take time to fully accrue and the Reserve Bank was unlikely to have the luxury of waiting.
Westpac chief economist Dominick Stephens said he expected the new funding programme to be small and targeted at business lending.
"We expect the RBNZ will introduce a business-oriented Funding for Lending Programme next week and will cut the OCR below zero next year, while simultaneously slowing the pace of bond purchases under the Long Term Asset Purchase Programme (LSAP)."
Stephens said his rough pick was that the Reserve Bank would allow banks to borrow from the FLP an amount equivalent to 3 per cent of outstanding loans.
"Across the whole banking system, that would amount to around $15 billion. Financial markets may be expecting something bigger."
In order to address the housing market issue, Stephens expected the FLP to include strong incentives for banks to increase lending to businesses.
"Perhaps banks will be able to borrow more under the FLP if they increase their loans to business, or small businesses. This is the approach that the Reserve Bank of Australia has taken."
But Stephens said attaching strings to the programme would likely reduce the total effectiveness of it.
"But it will direct more of the monetary stimulus at businesses rather than at house prices. Most importantly, tying the FLP to business lending will publicly show that the
RBNZ is sensitive to the impact monetary policy can have on house prices."
The booming housing market has prompted calls for the Reserve Bank to tighten the restrictions on lending again after taking the loan to value ratio rules off in May.
Bank chief executives have expressed concerns about low interest rates stoking an asset bubble, making it harder for first-home buyers to get on the ladder and increasing inequality between those who have a house and those who do not.
The LVRs won't be tackled at this week's monetary policy statement but are expected to be part of the discussion around the financial stability report on November 25.
Stephens said it expected the Reserve Bank to reintroduce LVRs next year from May but to announce the change sooner than that.
"The RBNZ has previously committed to keeping the LVRs off until May 1 2021, to provide certainty to lenders. A central bank's word is its bond, so the LVRs cannot be reintroduced earlier than May 1.
"However, an early announcement would help get around this issue, because banks
may then curtail lending in anticipation of the renewed LVR."
Stephen said he expected the restrictions to be targeted at property investors, not first-home buyers.
"Experience last decade showed that investor restrictions were the most effective.
Also, housing affordability is an extremely hot potato politically, and restricting first-home buyers' ability to enter the market could leave the RBNZ with burned fingers."