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Adrian Orr sees the economy making a 'sluggish' rather than a 'V-shaped' recovery; Says retail banks should lend 'courageously' but 'we need to keep open-minded to other forms of credit'

Adrian Orr sees the economy making a 'sluggish' rather than a 'V-shaped' recovery; Says retail banks should lend 'courageously' but 'we need to keep open-minded to other forms of credit'
Reserve Bank Governor Adrian Orr.

Reserve Bank (RBNZ) Governor Adrian Orr is emphasising the need for government spending to cushion the blow of COVID-19, saying monetary policy can only play a "supporting role" and retail banks can’t be the country’s sole source of credit.

Fielding questions by members of the Epidemic Response Committee on Thursday, Orr said: “The longer an economic slowdown persists, the higher unemployment becomes, the harder and harder it is for the banking system itself to be the provider of credit.

“That is why we need to keep open-minded to other forms of credit.

“The banking system will play a critical part, but even that has a limit to it.”

In terms of these other forms of credit, Orr said firms could raise debt themselves.

The RBNZ has told retail banks they can swap their holdings of “corporate paper” (big business debt issuances typically with shorter maturities) and other “asset backed securities” for the RBNZ’s cash.

By encouraging banks to support the corporate paper market, the RBNZ is helping corporates keep issuing debt.

The RBNZ is offering up to $500 million a week under this “Open Market Operation”. Assistant Governor Christian Hawkesby said banks haven’t taken it up on its offer yet, but its availability is giving banks confidence and is “helpful at the margin”.

Orr said the government also had a key role to play through “wider fiscal policy” like income support, wage subsidies, and direct employment by the state.

He didn’t mention the possibility of the RBNZ writing businesses loans, as the Federal Reserve is in the US for example.

Banks need to be ‘courageous’

Despite making these comments around limits to credit provided by banks, Orr assured New Zealand’s banks are well capitalised.

He also said: “Banks have to be out there doing their business, they have to be courageous and they have to be thinking about the long-term wellbeing of their customers."

The RBNZ is supporting banks as the Government instructs them to be a bit more liberal with their lending to business customers that quality to have their loans 80% underwritten by taxpayers under the Business Finance Guarantee Scheme.

The RBNZ is offering banks loans with three-year terms, at a rate above the Official Cash Rate (OCR), to help them lend to businesses.

Orr maintained it was too soon to say how the Business Finance Guarantee Scheme was going, but said he’d be monitoring banks’ lending through the scheme and the interest they charge.

‘Sluggish’ rather than ‘V-shaped’ recovery

Commenting on the state of the economy more generally, Orr said: “The real driving part of this particular economic challenge is domestic demand around the world.

“That demand - particularly with labour market displacements, the uncertainty around household wealth - will mean that a bounce-back in demand will be potentially very sluggish… rather than a traditional V-shaped bounce-back…

“One of the worst economic scenarios we see is where we’re bouncing between a Level 4, into 3, back to a 4; on again, off again.

“The most optimistic scenario is where we come out of this very very tight lockdown and we remain out of that lockdown in varying degrees of economic activity… domestic demand will be slow and partial and employment growth will be challenging.

“So it’s kind of not like a recovery from the Global Financial Crisis [where] suddenly the banks are all good again, or the Asian Financial Crisis.”

'End of the beginning'

Orr remained adamant fiscal policy should be the key response to the crisis, saying monetary policy is playing a “supporting” role.

The RBNZ is ready to buy more New Zealand Government bonds on the secondary market, should Treasury need to issue more debt so the Government can keep supporting businesses and households.

“At most, we’re at the end of the beginning around what may need to be done and what we can do,” he said.

The RBNZ’s Monetary Policy Committee on March 23 committed the central bank to buying up to $30 billion of New Zealand Government bonds on the secondary marketing over the next year. It on April 7 agreed to buy up to $3 billion of Local Government Funding Agency bonds over the next year.

Orr pointed out the $30 billion was equivalent to 40% of these New Zealand Government bonds on the market at the time.  

“We don’t want to crowd out the rest of the market by being the only participant, but as that opportunity grows, so does our ability to continue the quantitative easing,” he said.

He repeated what the RBNZ told last week, that cutting the OCR below 0.25% where it's at now, after fulfilling its commitment to keeping it at that level for a year, is an option.

Retail banks’ computer systems aren’t ready to go into negative interest rate territory yet.

QE programme equivalent to cutting the OCR by 150 points

Orr said the RBNZ’s Large Scale Asset Purchase programme is doing the same job in terms of helping the Monetary Policy Committee reach its inflation and employment targets.

Hawkesby said that international research suggests asset purchases worth 1.5% of a country’s gross domestic product (GDP) equate to 25 basis points of monetary easing.

So the RBNZ’s $33 billion bond buying programme should have a similar effect to cutting the OCR by 150 basis points.

The Monetary Policy Committee could expand the Large Scale Asset Purchase Programme after its next scheduled meeting ahead of its releasing its quarterly Monetary Policy Statement on May 13.

Hawkesby said the Statement (which details a range of economic forecasts) will also include scenarios, much like those released by Treasury this week.

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depends on demand I guess, not so much about low interest rates.

"Landlords in denial as deflation beckons"

I'm not surprised that this is looking more and more like a Japan style "L" journey with each passing day. For the patient and cashed up, there will be many opportunities in the coming years. Firstly, watch all this debt fuelled "froth" slowly but surely drain away. Its such early days of a drawn out deleveraging process followed by higher taxation to pay down Government debt. It won't be pretty.

I am certainly relieved to see Kiwibank is forecasting middle ground house price falls to be of a lesser magnitude than the GFC, where we had 825 basis points of OCR headroom. Did the GFC also have the following?
1) A "pandemic" reaction shutting our borders and destroying tourism
2) 40,000 AIR BNB's about to find their way back into the rental/housing market after a record 24 months of building consents
3) Because of point 1), 193,000 tourists were here on work Visas for the year to August 2019. Link Who moves into their dwellings if they leave the country?
4) A Labour Government

Its going to be very interesting and we dont know how long it will last. It could be like a MAFS reality show where the snippets of the coming episode dont fulfill the billing and the viewer who was hoping to see nasty clashes and blood on the floor is left very unsatisfied. Personally I am looking to the level 3 status, and getting a nice takeout, the wife wants a break from cooking and my attempts are far from the best. And will be adding to the economy in doing so

I would love an order of Paradise Sandringham's chicken special sometime soon. That's for sure.

RP - At last we agree on something - there will be many opportunities !!
Japan's situation came about by no Government intervention in 1989/90 when their banking system failed so a 'L' is the most unlikely outcome.
Those with good equity/cashflow/cashed up will be in a situation to take advantage of others misfortune.
My intention is to pick up another property or two, along with a nice discounted performance car.
The timing is critical here I see the prime time will be before the end of the year particularly after the 6 month support programmes of mortgage holidays and business loans.
Of course it also comes down the the willingness/confidence to part with cash out of the perceived safety of banks.
The world is not ending, our economy is going on a diet, we will have the reccession that is needed to make us stronger for the future.
Our Government debt will be substanially higher 40-50 % but that is completely manageable as we started with it at 19% and not 80-100% as many other countries including the US.
As you know all this stimulus will find a home somewhere and that is in asset prices so another jump up for sharemarkets and property as is already happening in the sharemarkets. I'm not suggesting this is good but a reality so chose to participate or watch and miss out.
After this settles down 18-24 months at a guess property will be the save haven again.
A whole generation have just learnt how quickly wealth can disappear in shares, how quickly commercial real estate can become a nightmare, how extremely poor returns on money in the bank is and will be for a long time, along with bank stability concerns.
NZ's position in the world as a safe well managed country thanks to Jacinda's and co's actions have done perhaps the greatest marketing campaign to make NZ even more attractive to live in.
I thank and applaud our Government's response and leadership during this Pandemic. Time will show if our action's prove to be the most effective but we do know NZ has avoided the horrid death that most of Europe ,UK and US are now trapped in. Our economy has been damaged in a controlled manner but that would happen probably to a great degree if we had let this Virus get out of control.
Happy investing in this time of 'opportunities' !

Shoreman, your outlook has abruptly shifted with the times - how predictable! Do you also argue that Sir John Keys assessment of NZ's future is wide of the mark? "New Zealand will suffer through multiple years of a "recessionary environment"

As current ANZ Chairman and ex-PM, what would Sir John know about such matters? Sure as the coming tsunami of defaults looks like an "L" to me.

NZ can create GDP growth using billions that is borrowed from others. Unless our country is earning it, in low to negative inflation world, the Piper will come calling eventually. Thinking the future will pan always out the same as the past (like in past cycles), is foolish.

You're the wizest person on this thread RP your insight is second to nun. Sometimes the smart people have bad luck. Stay strong my frend.

RP - No my outlook has not changed at all, perhaps your perception of me.
I'm in my early 60's and have lived through many recessions including 2 redundancies.
I don't buy into the worst case scenario, it's a difficult time but it will pass.
Our terms of trade are still showing good numbers that puts us on a good footing.
JK as many have an opinion but not all of them are going to be accurate.
As always time will reveal all, I will follow my strategy that has served me well which involves buying assets when others are not.
The only inconvenience to date for us is our 107 day around the world was cancelled.
Happy investing.


....even that has a limit....

Indicates that Mr Orr knows or feel something and is covering himself and the agency about what is going to happen in future.

Definitely what he knows or feeling is not positive or would have been taking credit for it and singing different tune not highlighting their limitation.

Wait and Watch


"Orr assured New Zealand’s banks are well capitalised..."
It's not what he was saying last year when he wanted the banks to lift their capital buffers...
It's pretty hard to believe him.


More debt to solve debt problems.


The solution to too much cheap credit for too long is to offer even more credit and even cheaper credit.

I think we need to create an AA themed group for central bankers.

Exactly, thing won’t change unless this virus wipes us out completely and people will keep go out and buy their cup of coffee everyday.


When he says courageous banks, is he talking about banks lending to houses, that's mostly what they do, right?

Nah, that's the easy part. It's courageous for banks to step out of their parallel universe of money creation and lend to actual businesses that live in a world of real risk of being solvent or not. That would require bank economists to actually assess risk. Way too hard, eats into G&T Friday time. It's much easier to lend into an ever increasing asset bubble.

You'll have a loan portfolio ten times larger than they currently do at one tenth the margins. However this will leave banks so sensitive to shocks from employment or asset price changes, the slightest breeze will topple the whole deck of cards.

The RBNZ will buy distressed mortgages if it gets too bad

Yeah the banks used to lend to businesses. They don't really now, 75% plus is on houses. Even when lending to a small business, the security taken is the owners house.


For those of you who don't already frequent the RBNZ's website, you can track how well capitalised individual banks are, their liquidity, their asset quality, etc using this dashboard: The data on there now is only up to the Dec 2019 quarter, but it's something worth keeping an eye on. 

Thanks for the tip Jenèe. Can I ask why the data is so out of date and whether there will be any moves to report more timely info.

There may be a delay for the next published results due to technical issues.

The graphs don't go below zero, lol!

There's a time lag with a lot of the big bits of data we get. For example, we will only get March quarter CPI inflation data on Monday. Govt agencies are publishing some preliminary data to paint a more real time picture of how things are going. I am no statistician, and appreciate govt agencies are under the pump and staff aren't doing 'business as usual' tasks, but I think they urgently need to prioritise releasing more info ahead of time. 

dash board info for qtr ending 31/3/20 only available by 29/5/20. from the horses mouth. I was pointed to this page on rbnz's website but couldn't find it there from what I was informed on an email.

Petrol in Aussie under a dollar.

90c in WA

US $0.93/gal in Texas according to my brother.

As a shareholder in a few banks I would say this might actually be the time to stop and think about the sustainability of this business model. Debt growth can't outpace the growth in free cashflow forever, loans must eventually be repaid and we are already "extending and pretending" on far too many. We need a period of stable and safe lending growth with careful portfolio risk management that leaves the organisation protected from future shocks.

The legacy of stewardship through this crisis will have long lasting implications on these organisations. The wind has changed and it's time to tack.

Wasn't that the idea of the last 10 years or so post GFC?

Who has the loudest voice amongst the shareholder groups? They're the ones who dictate bank behaviour. Didn't someone produce a report a while back that identified that all the major western banks were essentially majority owned by a group of 25? These are the ones who will be driving bank behaviour.

Who caused all this?Everyone must read this:
Professor of Canterbury University on China about Covid-19


In NZ you're more likely to go missing if you tell people house prices might fall.

If only that were true

'labour market displacements' = unemployment, in case anyone didn't know.

Watch utilities' and other blue chip shares in the stock-market rocket skywards when term deposits in the banks mature if the OCR is further reduced.

I am very uncomfortable about the lack of deposit guarantees for the Banks.

Right now the whole edifice of our banking system is built on trust , and that trust is very shaky right now.

The herd mentality during a crisis, driven by fear , is amply displayed by the recent run on toilet paper .The public had no trust in all the platitudes of the politicians that there was enough toilet paper.

If the public cannot trust politicians telling us not to rush out for toilet paper, just wait until some politician stands up and says the Banks are "safe'

At that point we are in serious trouble

I agree Totally

Bank exposure was always the vulnerable link in the turtle-stack.

Mac, I think his name was. Yurtle was the one at the top. Temporarily.....

My US and AU friends talk about toilet paper shortage. But in Auckland supermarkets, it is hard not to collide into the stuff. There was trust in our politicians on that roll :)

Best bit of news yesterday was the supermarket manager who flipped the bird at a customer who wanted to return almost 5000 toilet rolls and an equally stupid amount of hand sanitiser, here. The idiot tried to return them after being blocked from being able to sell them on line. The manager should be up for an award for that one action.

Jacinda Ardern is great!and her govt will be ok.This is what I thought after all Jacindas promises in the last election to the people of NZ.Well how I have changed my mind.
Kiwibuild-a failure,No homeless-homeless has increased,including street people and people being housed in motels,Keep rents down-rents have increased,No new taxes- 7 new so called taxes,get immigration down-immigration has increased,clean up our rivers-more rivers closed!,and now when they finally get talked into putting NZ into Lockdown by our amazing top Doctors Professors and Business people it was too late!The borders should have been closed much much earlier and all people entering NZ put into 14 day Quarantine,so then the economy could keep going and we would not be in Lockdown.Now we as NZers all have to pay the price economically and it's going to be very tough and difficult times ahead!And yet Jacinda and Labour seem to have the upcoming election won already.Interesting how people forget broken promises so soon!

Things can change - it'll be a long cold winter before the election for many. Churchill was expected to romp in until that war had been won.

Any news when they may bring in the deposit protection insurance?

After an OBR event.

I see have an article on the DP today. Very timely!

Banks are still charging customers racketeering rates. The table below is what they charge for loans to business .
Also note that they borrow from the RB at 0.75% and loans are 80% Government guaranteed:
Overdraft Interest Rates and Fees have rates ranging from 16.9% - 27.9%. This is supposed to be crises. Looks more like a racket. "Be Kind to each other" says our Great Leader. These are the banks responses:
Kiwibank ASB BNZ Westpac ANZ Heartland
(scroll down and weep)

Preferential Overdraft ( fees extra)
15.50% (secured)
Authorised Overdraft
Unauthorised Overdraft
22.00% p.a.
22.50% p.a

Not to mention the $5 "unarranged overdraft fee" I received once on my cheque account after making a purchase putting the account into debit by around $10, despite having plenty of funds in my savings account. Normally quite attentive with my accounts but I had other things going on in my life. I don't recall ever requesting the ability for my accounts to go into negative, so the bank "arranged" this facility on my behalf. I promptly had this fee reversed.

When I was a student, I had a Tertiary account which had a $500 interest & fee free overdraft. Every year without fail it would turn into a normal account on the 1st of January. As a student I was typically somewhere remote and had used the overdraft for beers and petrol on the way to New Years, and would be unable to fill up the car on the way home as my card would decline. Would have to spend hours on the phone sorting it out, often badly hungover. Traumatic.

Exactly why the banks should be robustly regulated. They are ripping their customers off.

Some will say change banks, but they are all the same.

The RBNZ has told retail banks they can swap their holdings of “corporate paper” (big business debt issuances typically with shorter maturities) and other “asset backed securities” for the RBNZ’s cash. By encouraging banks to support the corporate paper market, the RBNZ is helping corporates keep issuing debt.

Exactly-double the debt in a collapsing business environment?

by Audaxes | 30th Mar 20, 11:20am
Assistant Governor Christian Hawkesby said: “Our objective is to encourage banks to continue to fund their corporate clients by purchasing their debt securities, given the confidence that these securities can be funded by exchanging them with us for cash.":

Can anyone define the public utility of central bank reserves (supposedly cash) in the process of lending credit to banks' corporate customers?

Corporate bonds are underwritten in the first instance by investors swapping their savings for them, thereafter banks can commit to lend to corporate customers in the usual way by accepting their IOUs and crediting their deposit accounts with bank IOUs collateralised with corporate assets such as these savings (someone else's IOU).

If banks enter the market place to purchase corporate bonds and swap them with the central bank for reserves they have let the risk taking public out from a poor investment choice at a better price than they would have expected to receive and the banks can claim central bank IOUs as collateral.

The rentier class is supported yet again but banks have not undertaken any further credit creation on behalf of the majority who have no means to own securities in any instance, unless more corporate bonds are issued to the entitled investor class. And the merry go round continues for the few.

Orr said the government also had a key role to play through “wider fiscal policy” like income support, wage subsidies, and direct employment by the state.

Time for UBI (universal Super?) + Job Guarantee (central govt funded, local govt administered?).

The RBNZ is ready to buy more New Zealand Government bonds on the secondary market, should Treasury need to issue more debt so the Government can keep supporting businesses and households.

RBNZ will create new money to back-fill new public spending = no increase in consolidated-govt debt.

“One of the worst economic scenarios we see is where we’re bouncing between a Level 4, into 3, back to a 4; on again, off again"

Simple, don't go back to level 4, go to level 2 or level 0 and protect the over 70's

The limits? - by our calculations is until 2022 - 2023 onward is hard reckoning, that's in worst case scenario - means... nothing works, for the entire planet. So glimmer of hope if we can cross our fingers here. Remember when China cough? America Sneeze? the whole planet catches different cold & flu. But NZ is duffrunt.
The real limit though, is when Banks being asked to shed their year in year out past profit.. for charity purposes. Never, they would rather move their entire operation outside NZ, rather than touch that realm - $ Banks exist for profit, even if they merged for OBR? - it's still for profit