Interest Rates Set to Fall Further – Details of the RBNZ's LSAP | Ep. 201

In this episode, we discuss the Reserve Bank's announcement that it will use unconventional monetary policy to decrease interest rates further.

The Reserve Bank has announced a $30 billion programme to purchase government bonds on the secondary market. This programme will operate over 12 months to decrease long term interest rates.

That will likely have three effects:

• Lower long term interest rates will decrease the government's borrowing costs, making it cheaper to borrow and conduct expansionary fiscal policy
  
• Commercial banks set their retail interest rates based on the 10-year bond rate. That means a decrease in the government bond rates will likely filter through to the market rates
  
• Commercial banks often hold government bonds. When the Reserve Bank buys these bonds, commercial banks have higher liquidity. In essence, they have more cash. That allows commercial banks to lend more money to businesses and home buyers.
  

The outcome for property investors is that more banks will be more willing to lend money at cheaper interest rates.

This Large Scale Asset Purchase (LSAP) programme should be welcome news to business owners and investors alike.

We also touch on the fact that landlords will likely convert short term rental accommodation – like Airbnbs – into standard residential tenancies. Many investors question what impact that will have on the rental market.

Our view is that in the main centres the impact will be little felt. That's because the supply of rentals is highly inelastic relative to demand. That means a large increase in supply can only have a small impact on prices.

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