Lobbyist and think tank the NZ Initiative is concerned the Reserve Bank's role could 'morph' once it starts using unconventional monetary policies and it might feel required to align itself with the Government's fiscal policy

Lobbyist and think tank the NZ Initiative is concerned the Reserve Bank's role could 'morph' once it starts using unconventional monetary policies and it might feel required to align itself with the Government's fiscal policy

Think tank and lobbyist the NZ Initiative is concerned the Reserve Bank might "morph" into something resembling a sovereign wealth fund and could start aligning itself with the Government's fiscal policy.

It has expressed its concern in a new research note explaining why it believes the RBNZ would need boundaries if it begins to implement unconventional monetary policies.

The Reserve Bank is independent of the Government and operates monetary policy independently. 

The RBNZ has acknowledged it may resort to the so-called unconventional policies as the current main instrument of monetary policy the Official Cash Rate rapidly gets closer to zero (it's now 1%).

The RBNZ said last week (when slashing the OCR) that plans were well advanced for unconventional policies though it would not outline its specific thoughts are intentions about any such implementation.

ANZ economists have done a lot of work examining how unconventional policies may look and work.

In the NZ Initiative research note, penned by executive director Oliver Hartwich, chief economist Eric Crampton and Robert MacCulloch from the University of Auckland's Business School, the authors are calling for the Government to rework the terms of the official remit for the RBNZ Monetary Policy Committee to ensure clear differentiation between monetary and fiscal policy. 

"Under quantitative easing, the RBNZ could become an alternative to Inland Revenue and the Treasury as it would provide (indirect) funding to the government by purchasing government bonds," the research note says.

"If it went beyond that and started purchasing corporate assets, it could also morph into something resembling a sovereign wealth fund.

"If it chose to fund projects of a certain nature (say bonds with an infrastructure background or related to specific policy areas), it would again be more akin to Treasury."

The research note's authors say that in either of these scenarios, the RBNZ’s original focus on inflation and employment "could be distracted".

"The Bank might feel required to use its fiscal actions to align itself with the Government’s conventional fiscal policy and, almost as badly, market observers may expect that they would.

"The wording in the Remit for the Monetary Policy Committee at least suggests that the Bank should be generally supportive of the Government’s economic policy agenda – and not just of those elements that would typically fall within the realm of monetary policy."

They say that under normal economic circumstances, the commitment to the Government’s other objectives would be "mere prose without consequence".

"Once the nature of the RBNZ changes, however, this prose could be read as part of the Monetary Policy Committee’s mandate. It could mean that the RBNZ should take the Government’s policy aims into account when conducting quantitative easing."

This might mean, for example, the RBNZ might preferentially purchase infrastructure bonds or bonds to finance renewable energy projects.

"If that were to happen, the Bank’s independence could be called into question."

The research note's authors say the "only one certain way to prevent such a perception and such a dilemma" would require the RBNZ Governor and the Minister of Finance to rephrase and clarify the Remit of the Monetary Policy Committee to reflect unconventional monetary policy.

"The easiest option would be to remove the Government’s Economic Objective from the Remit. It sits awkwardly in this document anyway since conventional monetary policy would usually have little to do with achieving the Government’s non-monetary objectives. This is not to say that the Government’s Economic Objective was in any way mistaken but that responsibility for achieving most of the goals enumerated lies with other government agencies."

Regardless of whether the Minister and the Bank are willing to reword the Remit to provide that clarity, the research note says "it would be very helpful" if  RBNZ Governor Adrian Orr made very clear that, in the pursuit of any fiscal or quasi-fiscal policies, the RBNZ shall only be guided by its two monetary policy objectives: maintaining a stable general level of prices over the medium term and supporting maximum sustainable employment.

"...There need to be clear rules to govern the RBNZ’s conduct in unconventional circumstances and there must not be the hint that any of the RBNZ’s asset purchases are guided by anything other than its monetary objectives."

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I'd prefer a sovereign wealth fund to manage council assets than mess around with a huge QE program which will distort the lending market and prop up the asset bubble in residential property.


If you want the RBNZ to butt out and let the bubble burst give this a thumbs up

Thumbs down from me. I am hoping we get to negative OCR sooner rather than later:


Sorry, I've just taken on a mortgage because I was waiting for credible Govt intervention that never happened and it was either jump or miss out on the chance to have a family etc. If you now want to bankrupt me after making me pay more for housing, education and living costs than any other generation, you'll quickly find out what happens when everyone else hands the bill to one cohort. People under 40 don't have infinite capacity to work long hours and keep going backwards so everyone else can go forwards.

I am sorry but you jumped onto the ponzi scheme at its conclusion. You are the last man standing in a game of musical chairs. The spruikers needed people like you and unfortunately it sounds like you fell for their lies...... you can only thank TTP and his ilk for your future struggles.

You must be fun to be around.

"Fell for their lies" You mean I turned an age where I couldn't put off a family or the realities of life any longer? What do you expect Kiwis to do; just not have families or a stable roof over their head? Or are we just OK with an entire generation of Kiwis having to flee NZ as economic refugees?

John Key caused this. Hold the line people and wait for the prices to crumble. You will win if you stand together and keep strong. If you buy now your future and your families future will be harder than it should be. Learn from other peoples mistakes.

You can raise kids in a rental, thousands do it. And when you combine decent tenants with decent landlords then there is bugger all risk of being kicked out.

If you want the RBNZ to keep interferring and let the bubble continue give this a thumbs up

You will find the RBNZ don't set monetary policy for the resentful few.

No, it seems they set it for the wealthy few, since that's who low interest rates benefit most.

It's the wealthy few who are against low interest rates. If you have enough money to live off and still have savings set aside you are wealthy compared to people living paycheck to paycheck or through debt.

Just admit most of the whingers on here are rich old folk who are crying because the TD rates are getting hammered e.g. "dear boy... I will have to limit my cruises to the Pacific this season due to the atrocious OCR rate... What, what old son"

actually it's the rich who have made the money, because they own lot of assets.

You talk a lot of shit, its mostly the wealthy few with lots of leverage in their rental portfolios that jump for joy everytime the OCR drops.

New Zealand's debt market in its current state is probably too small for a QE programme to be effective.
The only way I see this move being remotely successful is if more companies end up issuing long-term bonds for growth funding instead of borrowing from banks.

QE in NZ will come in exactly the same way it would come in Australia... the central bank would print money to buy securitised mortgages off the banks.

It'd drive down the margins on mortgages and incentive borrowers to lever up.

They could feasibly look at rural mortgages as well, however the banks aren't really set up to securitise rural or company loans.

Okay. So this does nothing at all to relieve capacity pressures for the productive economy.
Plus, in the absence of new housing stock and broader economic growth, this programme would simply lead to a small number of asset-rich individuals swapping houses between each other with "steroid" money.

I never said it was smart.. I just said that'll be the form of QE we get.

Wow the Think Tank must have looked around the world what Negative Interest rates have achieved.

10 years in Europe and counting, destroyed the bond market and must buy 50% of ALL GOVT DEBT.

Yep, absolute Failure but hey lets DOUBLE DOWN and go with Orr's joke we have more tools to use.

Yes, the best way to support a capitalist system is to nationalise its assets.

It's interesting to me that reserve banks will tolerate no period of wealth destruction to reorganise the economy ("creative destruction") even when absolutely clear that productivity is falling.

negative interest rates are on the way
that means those of us that have little or no debt but cash or equity will be able to load up on properties
I guess that is one way of stopping house prices from falling

"...There need to be clear rules to govern the RBNZ’s conduct in unconventional circumstances and there must not be the hint that any of the RBNZ’s asset purchases are guided by anything other than its monetary objectives."


Quantitative Easing and the Quantity Theory of Credit - Richard Werner

2. The origin and definition of QE
The QTC suggests that neither interest rate reductions nor fiscal expansion, nor reserve expansion, nor structural reforms would be able to stimulate nominal GDP growth. Based on this model I proposed in 1994 and 1995 that a new type of monetary policy be implemented in Japan, which aimed not at lowering the price of money, or expanding monetary aggregates, but at the expansion of credit creation for GDP transactions.4 Since the expression ‘credit creation’ was considered difficult to understand in Japanese, I prefaced the standard Japanese expression for monetary stimulation (‘monetary easing’ or ‘easing’) with the word ‘quantitative’ to declare that ‘Quantitative Easing’, defined as credit creation for GDP transactions, would create a recovery (Werner, 1995). ‘Quantitative easing’, or, in long, ‘quantitative monetary easing’ are literal translations of the Japanese expressions 量的緩和 (ryōteki kanwa) or 量的金融緩和 (ryōteki kinyū kanwa), kanwa, respectively. These expressions had until then not been used to refer to the money supply, bank reserves or deposit aggregates. I suggested in numerous publications that the central bank purchase non-performing assets from the banks to clean up their balance sheets, that the successful system of ‘guidance’ of bank credit should be re-introduced, that capital adequacy rules should be loosened not tightened, and that the government could kick-start bank credit creation and thus trigger a rapid recovery by stopping the issuance of bonds and instead entering into loan contracts with the commercial banks (e.g. Werner, 1998).

My articles caused consternation among economists of diverging schools of thought. The Keynesians, such as Richard Koo, disputed that further monetary stimulation of any kind was needed and that fiscal policy on its own was going to be ineffective. The government listened to Mr Koo, and Japan continued to expand its national debt in massive spending programmes, while credit growth continued to stagnate. So did the economy. Monetarists, such as Peter Morgan or Alan Meltzer, likewise argued that a lack of bank credit was not a problem and ‘quantitative easing’ in the form of credit creation was not needed. Instead, they argued, an expansion in bank reserves at the central bank would do the job. But massive reserve expansions failed to make any impact and due to stagnating bank credit, economic growth remained well below its potential for most of the following decade and a half. Supply-side economists and proponents of real business cycle models argued that a lack of bank credit could not be the problem — after all, their models did not include banks! I warned during the 1990s that fiscal expansion funded by bond issuance was likely to crowd out private demand, that the expansion of bank reserves would have no impact as idle reserves do not translate into bank credit growth when banks are risk-averse, and that structural reform, if able to increase productivity (which is doubtful) would merely boost potential growth, while Japan’s economy had remained in recession due to a lack of demand. Link and long version

There is a precedent. Hank Paulson of the Treasury and Tim Geithner of the Fed joined hands to indulge in fiscal policy a decade back to pull the US out of the GFC mess. And it worked for them, though at a huge cost to the world and various funds.
May be we can try it at a smaller scale here.
When can I expect the cheque ?

That was after they had stopped world trade by stupidly closing Lehmann Brothers. They didn't expect world trade finance to just stop. Seeing their collossal mistake, they then did everything they could to patch up the mess they had created. It still is not fixed.

May be here too, Orr is creating a mess with the unexpected jumbo OCR cut, giving a complete desperate signal about the economy ? And expecting the Treasury to bail every one out ?

This is such a millennial crisis, NZ and Australia aren't close to recession, house prices are stable, sharemarkets at or near highs, unemployment is <5% and credit is still flowing. Yet here we are with cash rates at 1% and RBA/RBNZ both considering QE & negative rates. It's all a bit surreal, like we can't dare allow the snowflakes to be triggered by a recession.

Who/What is really driving this panic ? Who benefits ?

To be fair, there are some serious clouds on the horizon, no inflation and spare capacity in the economy. Who benefits, holders of risk assets.

As a millennial, forgive me. Definitely us who chose to suppress wages, blow house prices out through strangling supply and then open the taps on full for immigration.

Definitely millennials who made those policy decisions.

Wages are suppressed by immigration and your iphone, the latter is on you my friend.

Imagine having this take. For years house prices have been going up faster than inflation, faster than wages have increased, faster than people can save for the required deposit but apparently, central banks pumping even more heat into asset prices is apparently to the benefit of "snowflake" millennials because we have phones? Leaving aside the fact that a typical (and I'm being generous here) 20% deposit will be over 100 times the price of a flagship smartphone, how exactly do the ever distant goalposts of home ownership benefit younger generations and not those who bought when property was affordable on a single income, and have since seen massive increases in equity due to increasing inflation and lowering interest rates?

You missed the point completely, we were discussing the lack of inflation not the cost of an iphone. The iphone is an amazing deflationary device where you can check the price of anything online and order directly. It's killing retail. Nice rant though

If retail is relying on an unreasonable margin compared to other countries, where wages are higher and goods are cheaper, then retail is killing retail. The fact I can see what is and isn't a reasonable price for something isn't a market failure, that's how a market is actually meant to work. Some people just have trouble imagining a business model that isn't importing something, adding 20% and then selling it on.

If you're going to blame anyone blame the banks and by default John Key because he is a banker. As we saw with the subprime wipe out and soveriegn debt crisis the banks engineer the whole thing to A. Inflate the value of assets with easily obtained debt then B. at a certain point in time trigger a collapse of that assets price by scaremongering a panic, which leaves the owner indebted and inevitably sees the asset move into the banks balance sheet under liquidation. The NZI is the old business roundtable and they won't like this RBNZ idea one bit because it threatens their ability to sow the seeds for creative destruction or in other words the opportunity to make lots of money out of anothers misfortune is looking less likely if the rbnz gets into its stride.

Heaven forbid a government monetary institution should act in such a way to support democratically chosen public purpose. What an outrage.

Heaven forbid a government monetary institution should act in such a way to support democratically chosen public politically/ideologically driven and economically suspect yet electorally winning purpose. What an outrage.

There, fixed.

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Perhaps we should look at somewhere more successful for useful ideas rather than adopt the intellectually bankrupt ideas of the failing major powers. Singapore monetary policy, based on running a slightly positive current account balance, perhaps.

The point of the quote is that our monetary structure has been a key part of the decline in our living standards, causing us to argue amongst ourselves over who to blame. The issue is a structural one which "impoverishes many, but enriches a few" as Keynes put it.