RBNZ Chief Economist Yuong Ha on what it would take for the RBNZ to drop its tightening bias, and why the RBNZ is hesitant about selling the government bonds it owns

The Reserve Bank (RBNZ) is maintaining the tightening bias detailed in its August 18 Monetary Policy Statement, even though the number of Covid-19 cases in the community has escalated since then.

RBNZ Chief Economist Yuong Ha also clarified (see video interview above) that the RBNZ would rather not try to tighten monetary policy by actively selling the bonds it bought via its Large-Scale Asset Purchase (LSAP) programme. It would rather take the well-trodden path of raising the Official Cash Rate (OCR).

Furthermore, Yuong confirmed the RBNZ would keep its Funding for Lending Programme (FLP) in place until the end of 2022 to uphold the “contractual arrangement” it made with retail banks last year.

RBNZ remains hawkish

Ha was clear the RBNZ remains eager to lift the OCR as soon as possible.

RBNZ Governor Adrian Orr last Wednesday said Monetary Policy Committee members would need to see “significant different outcomes - in particular to demand - to change our mind”.

Ha echoed this sentiment, but wouldn’t give specifics on how long lockdowns would need to be, or how much of a U-turn the economy would need to make, for the RBNZ to drop its tightening bias.

He also indicated the RBNZ considered the possibility there could be a Covid-19 outbreak when it prepared the bulk of its hawkish Monetary Policy Statement before news of Covid-19 in the community emerged.

“The position we're in now, going into this lockdown, feels quite different to where we were 12 to 18 months ago,” Ha said.

“Back then we were sort of staring into this huge pit of uncertainty. We were really concerned about how the economy would recover; how households would respond. There were no vaccines in sight. Fiscal policy hadn't yet made its move.

“Where we're sitting now is that we've learned a lot, even though this lockdown feels just as uncertain in terms of duration and of course.”

Ha said the RBNZ knew policy responses - particularly by government - were effective. He said it also knew households are largely willing to spend up once they’re out of lockdown, if people are healthy and confidence is maintained.

“You'd have to really fundamentally change and challenge some of those working assumptions around how households respond [to lockdowns] for us to really change our view [outlined in the Monetary Policy Statement] materially,” he said.

Covid-19 might be with us permanently, but very loose monetary policy can't be

The RBNZ said in the Statement that it was committed to lifting the OCR to what it believed to be the neutral rate of 2% (which is neither stimulatory or contractionary) by 2023 despite Covid-19 possibly hampering productivity long-term. 

"The emergence of highly contagious variants of Covid-19 reduces the likelihood that New Zealand will be able to ease border restrictions in the future and be Covid-19 free," the RBNZ said.

"This will lead to ongoing and challenging trade-offs between public health, economic outcomes, and mobility...

"Prevalence of the disease may result in permanent changes in the way we work and interact, which could lower the productive capacity of the economy on an enduring basis.

"How the global economy adapts to the ongoing presence of Covid-19 will also have significant implications for the New Zealand economy, via trade, financial, and confidence channels."

Hesitation over going down an untrodden path

As for the LSAP, Ha said the RBNZ’s initial thinking is that it isn’t keen to actively sell the $54 billion of New Zealand Government Bonds it has bought from banks, fund managers, etc since March 2020.

By buying these bonds it put downward pressure on interest rates. Actively selling them before they mature would tighten monetary conditions.  

Ha said, “We know a lot more about how to calibrate tightening policy through an OCR. We know less about how you would do that through selling down government bonds.”

He was also wary of the RBNZ not flooding the market with bonds at a time Treasury’s bond issuance remains elevated ($30 billion of issuance is planned for the 2021/22 year).

“The key thing to remember is, on the way down, you sort of made a big splash about the LSAP. Markets are dysfunctional, you want to keep interest rates low,” Ha said.

“On the way out, you want to be quite methodical and want to be operational in the background. We're not intending to send massive policy signals through the withdrawal of the LSAP programme.

“We largely see it now as just managing... the holdings of those assets on our balance sheet.”

The RBNZ is expected to publish a strategy for managing its bond portfolio in coming months.

See the video interview for more on the FLP, and what the RBNZ hopes to achieve by keeping the OCR at 0.25%.