Transmission Currents And The Flow Of Monetary Policy To Domestic Financial Conditions

In a speech presented today at the CBA Global Markets conference, RBNZ Director of Financial Markets, Adam Richardson, outlined the transmission of recent New Zealand Official Cash Rate (OCR) cuts to domestic financial conditions is playing out largely as expected.

Mr Richardson conveyed that financial conditions in New Zealand have loosened, with interest rates falling and credit conditions becoming more favourable.

“As with any cycle, there are some unique features that we have had to take account of when assessing the stance of monetary policy,” Mr Richardson said.

In the speech, Mr Richardson highlighted that some of these features are the result of domestic developments, such as a temporary shift in mortgage holder preference for shorter terms in expectation of further rate cuts. Others are the result of global factors, such as higher global term premia and their contribution to a significant steepening in government sovereign bond yield curves.

As part of its monetary policy deliberations, the MPC accounts for the various domestic and global factors that push financial conditions around, allowing it to effectively steer domestic financial conditions to be consistent with the inflation target.

Mr Richardson also stressed that, “the cash flow channel is an important and very visible part of monetary policy transmission. However, other channels of transmission potentially play a more important role.”

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