(Bloomberg) -- New Zealand’s central bank said it had to hike interest rates more than expected in its last tightening cycle because of the amount of liquidity that had been added to the financial system during the Covid-19 pandemic.
The flood of money lowered bank funding costs and meant that when the Reserve Bank began raising interest rates in late 2021 it didn’t have the same impact as in the past, Assistant Governor Karen Silk said in a speech Wednesday.
The RBNZ progressively raised the Official Cash Rate from a record-low 0.25% to a peak of 5.5% in May 2023 and held it at that level until August this year. Silk said the trough-to-peak increase in the New Zealand two-year swap rate was 570 basis points.
“However, the lower cost of funding experienced through that period by banks, as represented by the funding spread, meant that this increase was not fully passed through to home loan rates,” she said. “The upshot of this is that financial conditions were less restrictive during the recent tightening cycle for the same level of the OCR when compared with previous cycles.”
The RBNZ was able to factor this into its decision-making to ensure that financial conditions were where they needed to be to achieve its monetary policy objectives, Silk said.
“The OCR, and wholesale rates, have been slightly higher than they otherwise would have been to account for this,” she said.
Silk said that pandemic interventions such as government wage subsidies and the Reserve Bank’s additional monetary tools — such as quantitative easing — boosted the volume of deposits, which are the largest source of bank funding. As a result there was a significant decline in funding costs.
“Traditionally there has been a significant degree of pass-through from changes in wholesale rates into home loan pricing,” she said. “However, the effectiveness of this channel of monetary policy transmission can also be influenced by changes in bank funding spreads.”
©2024 Bloomberg L.P.