RBNZ expands quantitative easing programme by $3 billion

Bonds

RBNZ offers to buy up to $3 billion of local government bonds, in addition to $30 billion of central government bonds, to support liquidity

7th Apr 20, 4:20pm by Jenée Tibshraeny

The Reserve Bank (RBNZ) is increasing its quantitative easing programme by committing to buying local government bonds on the secondary market to support liquidity and keep interest rates low.

Its Monetary Policy Committee (MPC) on Sunday decided to extend its Large Scale Asset Purchase programme, unveiled on March 23.

So, in addition to committing to buying up to $30 billion of New Zealand Government Bonds over the next 12 months, the RBNZ will buy up to $3 billion of Local Government Funding Agency (LGFA) bonds.

This represents about 30% of all the LGFA bonds on offer.

The RBNZ had previously signalled it would extend its programme to cover LGFA bonds, so the news isn't unexpected.

There was a delay between the MPC making this decision on Sunday, and the announcement being made on Tuesday because Finance Minister Grant Robertson had to agree to extend and increase the indemnity provided to the RBNZ to cover any losses it may incur.

The RBNZ on Monday made a “small scale offer” to buy LGFA bonds “until further notice”. This appears to have been a stop-gap measure, pending the MPC getting the necessary sign-offs to commit to buying a substantial amount of LGFA bonds under its Large Scale Asset Purchase programme.

ANZ strategist David Croy noted there was a decent uptake by investors, who sold the RBNZ $75 million of LGFA bonds on Monday under the "small scale offer" (which is distinct from the Large Scale Asset Purchase programme).

Investors selling the RBNZ bonds gives them cash to invest elsewhere, including in buying new New Zealand Government and LGFA bonds issued to pay for the COVID-19 crisis. Treasury's New Zealand Government Bond issuance is expected to hit a record $25 billion in the year to June.

The MPC said that the RBNZ's commitment to buying New Zealand Government Bonds has so far achieved its goal of reducing longer-term interest rates.

Yet it said: “The negative economic effects of the COVID-19 outbreak continue to evolve.

“The Committee agreed it was important that monetary policy operated as effectively as possible.

“The LGFA bonds also play an important role in determining interest rates faced by firms and households. As such, the Committee agreed that the purchase of LGFA bonds by the Bank will provide stability and retain confidence in New Zealand’s capital market.”

Going into further detail, RBNZ Governor Adrian Orr, in his letter to Robertson requesting an extension of indemnity, said: "Over recent weeks... the Bank has observed signs of significant dislocation in other New Zealand debt markets, caused by a combination of the near-closure of global credit markets, domestic intermediaries reducing risk due to increased market volatility, and fund managers liquidating their holdings in order to meet redemptions.

"There is particular concern about the dislocation and lack of liquidity in the market for New Zealand LGFA debt.

"LGFA debt provides a critical benchmark for non-government credit instruments in New Zealand, and in normal times is the most liquid part of this market.

"A persistent lack of liquidity would have a deep and lasting detrimental impact on the confidence in New Zealand’s debt capital markets, which will increase interest rates in New Zealand more broadly and inhibit the transmission of monetary policy.

"This presents a threat to the achievement of the MPC’s economic objectives."

The MPC is due to update its economic assessment and the size and scope of its Large Scale Asset Purchase programme at its next scheduled meeting on May 13.

Here’s the record of its meeting in full:

3-5 April 2020

On Friday 3 April MPC members were informed via email that while the Large Scale Asset Purchase programme (the ‘Programme’) had been successful to date in lowering government bond yields and improving the functioning of this market, there were growing signs of a lack of liquidity in the broader corporate bond market.

The Bank had observed signs of increasing illiquidity and dislocation in the Local Government Funding Agency (LGFA) market in particular in recent weeks. This could be largely attributed to a combination of the near-closure of global credit markets, domestic intermediaries reducing their participation due to recent volatility, and fund managers liquidating their holdings in order to meet redemptions.

The Committee was advised that the LGFA was a critical benchmark for non-government credit instruments in New Zealand, and was normally the most liquid part of this market. Reserve Bank staff advised the Committee that a lack of normal market functioning was posing a significant risk to the transmission of monetary policy in New Zealand, which would compromise the ability of the MPC to meet its economic objectives.

All members were made aware that steps were being taken to enable a decision whether to add LGFA debt purchases to the Programme. These steps included early engagement with the New Zealand Treasury on an extension of the indemnity provided by the Crown on 21 March 2020, and operational preparations.

On Saturday 4 April, the Chair of the Committee called for a decision to be made via conference call the following day. Committee members received papers on Saturday evening containing advice from staff on the expansion of the Programme to include LGFA.

The Committee’s discussion focussed on understanding the nature of the issue, the risk to market functioning, and on the implications for the availability of funding and interest rates faced by households and firms. The Committee noted staff advice that secondary market purchases of LGFA bonds of NZ$3 billion, representing about 30 percent of the LGFA debt market, would support the smooth functioning of this market and improve market liquidity.

The Committee noted that a full economic assessment was currently being prepared by staff and would underpin any decision at the scheduled meeting in May to review the total size and asset classes within the LSAP programme.

The Committee assessed the purchase of LGFA debt against its principles for alternative monetary policy:

In the current context these purchases were likely to be effective in enabling the Committee to meet its economic objectives of medium-term price stability and supporting maximum sustainable employment. Although LGFA bond yields are not a direct benchmark for retail interest rates, they form an important component of the monetary policy transmission mechanism. A persistent lack of liquidity in this market would have a deep and lasting negative impact on the confidence in New Zealand’s debt capital markets. This would be likely to raise interest rates in New Zealand more broadly and thereby inhibit the transmission of monetary policy.

The Committee noted that purchases of LGFA debt would also support financial market efficiency and stability, by increasing confidence in this part of the debt market. These purchases would provide liquidity, aid price discovery, and enable banks to shift their existing inventory of assets to alleviate credit limits and thereby support the efficient functioning of primary and secondary financial markets.

The Committee reached a consensus decision to:

Purchase up to NZ$3 billion of LGFA debt on the secondary market within the next 12 months.

Revisit the overall size and eligible assets of the Programme at the scheduled decision on 13 May 2020.

Continue to delegate to staff the implementation decisions of the Programme.

Communicate the Programme in terms of the total volume to be purchased.

Participants:
Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha
External: Bob Buckle, Peter Harris, Caroline Saunders
Observer: Caralee McLiesh
Secretary: Rebecca Williams

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37 Comments

by Good Samaritian | 7th Apr 20, 4:38pm 1586234281

The big boys have disappeared to plug the holes in much larger sinking ships.

by Pragmatist | 7th Apr 20, 4:46pm 1586234772

A billion here, a billion there, pretty soon we'll be talking real money.

by DIYman | 7th Apr 20, 4:52pm 1586235135

Apologies to anyone who saw this last week, one of many by John Clarke about banks, and debt, but this one from Oct 2011, is more and more relevant by the minute.
https://www.youtube.com/watch?v=j2AvU2cfXRk

by custard | 7th Apr 20, 5:01pm 1586235703

The can has been kicked so far into the future that for all intents and purposes - it no longer exists.

by antonymouse | 7th Apr 20, 5:20pm 1586236836

The can is just about to enter a black hole!

by custard | 7th Apr 20, 5:41pm 1586238070

A region of space having a gravitational field so intense that no application of Central Bank prudence can escape.

by Audaxes | 7th Apr 20, 5:23pm 1586237033

By buying government bonds, the RBNZ increases demand for these bonds, which in turn reduces the yield on these bonds.

Because a number of the interest rates in the economy are calculated off the yield interest rates for government bonds, a move to reduce these rates will enable retail banks to lower their mortgage and business lending rates. This encourages people to spend, stimulate the economy and keep inflation and employment near their targets.

Investors (including retail banks) also receive a cash injection when they sell government bonds to the RBNZ. Link

Hmmmmmm...

Again, go back to Friedman: “low interest rates are a sign that monetary policy has been tight.” The reason interest rates aren’t being pressured higher is that there have been no inflationary pressures because there hasn’t been rising nominal incomes nor capital investment which would’ve been stimulated if money had actually been printed at some point. The great non-inflation fallacy of our time is different than what it had been in Friedman’s; and interest rates are telling us exactly that.

Central bankers today aren’t trying to peg interest rates to a low level, the bond market is doing that for them and they are actually trying to make the case that the resulting low interest rates are somehow good. And because it really isn’t, they keep doing the same things over and over and over. No radical rethinking of the process deep down to the fundamental intellectual level. Link

by Independent_Observer | 7th Apr 20, 5:42pm 1586238139

Yes but imagine if you had the balls to do something everyone else isn't doing to try and resolve the problem, and it failed terribly? So instead all reserve banks are copying each other and failing. It's a race to the bottom, but nobody seems to know yet what the very bottom of the bottom looks like. One guessing that we're going to find out in the next few years.

The first point would be to define the problem - but even that becomes hard. Have we ever had a statement as to why we need to keep dropping rates? Other than our 2% inflation target and continuous need for growth and 'must avoid recession at all cost' mindset?

We can't define the problem but we know that the answer is QE. Seems legit...Each time rates fall, its a sign of failure, not success.

by Kate | 7th Apr 20, 9:29pm 1586251773

Currency and stock market manipulators the lot of them. Beggar thy neighbour looks to have buggered us all.

Thing is, it doesn't seem the world has a philosopher king with the recipe for paradigm shift emerging. I'm reading lots of commentary on what went wrong and not enough on how to put it right. There must be someone out there with a new recipe ...

https://www.google.com/search?q=macarthur+park+lyrics&rlz=1C1CHBF_enNZ7…

by scarfie | 7th Apr 20, 8:22pm 1586247720

I said this on a facebook post the other day. There is an inertia behind the status quo that is too great now for anyone person to shift. This inertia would need to be met by a greater force to deflect from the current trajectory. It would take a massive force to reflect it. I don't see that anywhere, nothing even close. Maybe a death would do it....Boris?

by Independent_Observer | 7th Apr 20, 8:36pm 1586248575

Again though - I think we need to clearly define the problem. Which I don't think anyone has done. I think if you even asked our Robertson and Orr if QE is a sign of failure and if it is, what is the problem - they would struggle to answer that question. They'll say its a liquidity problem, or a debt problem - but question is why have we put ourselves in this position? (which was probably going to happen regardless of COVID 19)

If anyone on this site has the smarts to clearly identify the problem we have in terms that can be simply put (without writing a dissertation) that would be great.

by Panther | 7th Apr 20, 8:56pm 1586249795

The fact that our economies require growth and inflation of around 2% to keep ticking along, yet our growth and inflation since the GFC has primarily been driven by lowering interest rates and we - along with most other nations are about to hit interest rates of zero/the end of the line.

It's that part of the movie when the protagonist has a gun held to the bad guys head but the bad guy can count and gently suggests to the protagonist that maths wasn't his strong suit in school and that his six-shooter is empty.

by murray86 | 8th Apr 20, 7:56am 1586289364

I have asked this before - why must inflation be intrinsic to an economy? Such a position is one based on perpetual growth, which is utter rubbish. Why can't equilibrium be the target? Indeed I suggest some contraction is actually required.

by Kate | 7th Apr 20, 9:25pm 1586251527

The problem is a global one. So the philosopher king with the 'big idea' needs be someone from (or installed into) the IMF, or the World Bank, or Bank of Int'l Settlements, or the UN, or somewhere like that. Someone with int'l standing who proposes a global re-set with no winners, but a means of trade that is a stabilizing force with equity and fairness at its core. The present debt won't be repaid by anyone, so some form of debt forgiveness is inevitable - only other means of settlement is war - and that has no winners either.

I suspect many, if not all of the current institutions have to go. But what do they get replaced with? Perhaps some form of open-source AI - a machine that sorts out the interconnected mess central banks and the financialization of everything has got us into?

by Independent_Observer | 7th Apr 20, 8:44pm 1586249043

Thanks for the link - perhaps there's been a love affair with the idea of falling interest rates that needs to be resolved. It seems to be the only solution we understand, but guess that makes sense if that is what has been experienced the last 30+ years. But the solution is also the problem - so its zero sum - not a solution at all.

At some point rates will rise - history dictates so. So perhaps we need to remove the stigma around inflation? I.e. why is higher inflation bad? I think improved financial literacy would help as well. Most of my friends have got into rental properties, yet when I explain the risks to them they have no idea - I ask them about property bubbles in Ireland, Japan, USA - they have no idea what I'm talking about. They don't know what a bond is nor how interest rates might effect pricing. They've never purchased a share before. All we've done in NZ is induce housing and debt mania - so I think additional finance (behavioural element as well) education (at high school level) would be a positive move. Understanding risk and diversification would help.

I've argued before that capitalism coupled with democracy will only result in continued boom/bust cycles. Growth phases can be politically very beneficial - so why act with prudence and risk losing votes? Typical voters are greedy and self interested - they don't appear to take a utilitarian view on political issues around the economy. If you try to do the right thing, you will be penalised at the polls - so this creates a form of corruption as politicians can't do what they think is the best thing for the country - they are limited by the stupidity of the voters (see my comments above about better financial education).

Perhaps to be a MP you have to put all of your assets with the exception of a single family home into a blind trust so you are actually impartial to the policies you are setting? Should this be true of all staff working at the central banks as well? How else can they do the best for 'the people' they serve when they have a significant bias (either conscious or not) in their actions/decisions?

by The Lark | 8th Apr 20, 4:09am 1586275777

Government do not serve the people. They serve the elite. Policy/regulation, is written by the elite/corporates. That's why easy, free public money is always handed out to them. The system is a ponzi scheme, the elite take their wealth out, the people lose their investment. Simple. Where do think the crash starts?
The number of homeless, and living in poverty, even in good old nz, are testimony to how much government cares. And as the gap between haves and have nots grow, what makes those with nice houses and cars, and massive debt, think they are any different to those homeless they pass on the way to work each day?

by murray86 | 8th Apr 20, 7:51am 1586289110

The second paragraph of the second citation Audax; is the writer saying he expects the banks to actually change and constrain their own behaviour, and act like they're regulated? I don't think it has started snowing in hell yet has it? They are too busy trying to figure out how they can profit from the current mess and frankly don't give a damn about anyone else!

by Caleb | 7th Apr 20, 5:32pm 1586237523

Next year a Big Mac combo will cost 20, milk 5/L, coffee 9, 1.5mil for an average house in Hamilton, Air NZ shares 5.50 and inflation 'officially' running at 2.25%

by scarfie | 7th Apr 20, 8:25pm 1586247953

How? Serious question. It isn't really resulting in any new spending, just continuing existing spending.

by Caleb | 7th Apr 20, 10:07pm 1586254024

Seems rational that the average person won't borrow and spend.. but the worldwide money supply is expanding dramatically and so, surely it must surface sometime, somewhere.. Another suprise instore.

by The Lark | 8th Apr 20, 4:18am 1586276284

Rational? For the last 12 years the economy has been driven by property. It drove the economy because rational people really believed that property prices always, and only go up. So they borrowed against their houses, keeping minimal equity in their houses. They bought cars, boats, overseas holidays, etc. They warn good money, but live pay check to paycheck. Often using the credit card for unexpected Bill's, and household expenses. Cost of living increased, council rates increased. A lot of people fell by the wayside, and who really cared? Printing money, handing it out, will simply hold the truth at bay for a little while.

by JLM | 7th Apr 20, 10:22pm 1586254978

Don’t mean to scare anyone but to answer your question, the reason they are buying bonds is because foreign capital that’s been accumulating here over 30 odd years, is leaving. They’re trying to maintain the status quo spending, yes, but they’re replacing foreign capital.. Leads to a collapse in the currency

Property won’t rise though, just tradable goods.

See Iceland if you want a semi example

by Beach Tunneler | 7th Apr 20, 6:05pm 1586239544

I’m interested how Treasury will treat the impact of QE operations (a) in the Crown financial statements and (b) on fiscal indicators – i.e., gross/net debt. :)
How will QE gains be treated? I agree with Audaxes that simple seigniorage is the profit earned from issuing coins and banknotes. The Crown financial statements show currency issuance as a positive cashflow (financing) / liability increase (currency in circulation).
But QE goes beyond physical printing and minting and involves creating money through RBNZ’s open market operations. RBNZ’s government debt purchases will presumably increase money supply, but will this be treated as a seigniorage gain for the RBNZ/government or as a liability? And how will it be disclosed?
Moreover, QE operations will result in applicable government debts being held and treated as an RBNZ asset and concurrently as a Treasury liability. Will these amounts be eliminated in the consolidated Crown financial statements? How will this be treated for net/gross debt etc?

Can anyone explain the applicable accounting entries? e.g.,
(1) Treasury/DMO sells $5b bonds:
Dr Cash $5b
Cr Borrowings $5b
(2) RBNZ buys $5b bonds (QE operation):
Dr Marketable securities $5b
Cr ??? Liability (Currency in Circulation) / Revenue (Seigniorage gain) ???? $5b
(3) Consolidation / elimination entry:
Dr Treasury/DMO: Borrowings $5b
Cr RBNZ: Marketable securities $5b

by custard | 7th Apr 20, 6:38pm 1586241483

Ivory Tower remains calmly oblivious to the fallout:

“However, Mayor Phil Goff has signalled today he is pushing for a planned 3.5 per cent rates increase from July.”

https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12323264

by Beach Tunneler | 7th Apr 20, 6:42pm 1586241774

Phil's former cabinet colleague, Marian Hobbes, trumps that with a proposed 9.1% rates increase for the Otago Regional Council :)

by Squishy | 7th Apr 20, 7:00pm 1586242834

Never underestimate local governments ability to turn money into disappointment. Wellington swims in it's own sewage and wait on cancelled bus services while councillors debate if a 30km/h speed limit is appropriate. As voters we are failing.

by waymad | 7th Apr 20, 7:51pm 1586245899

As voters we are failing - no, Squishy, don't be too hard on yourself (and by extension, on the rest of us Ratepayers strapped to this rocket).

Voters only vote for Councillors.
Councillors have only one Employee - the CEO.
The CEO employs everyone else.

So all staff under the CEO actually are insulated totally from the Councillors. To staff, Councillors are a set of buffoons around a very distant table.

So staff are perfectly free to pursue their own aims and objectives and higher budgets, to the extent that these fly under the CEO's radar. And render 'reports' up through the CEO to the Council which lead to largely pre-determined policy positions which, quelle surprise, support those very same aims, objectives, and those safe and comfortable staff lives......

by ShoreThing | 7th Apr 20, 6:46pm 1586242007

The Reserve Bank needs to be disestablished immediately, these absolute crooks.

by Squishy | 7th Apr 20, 6:55pm 1586242506

I have to confess that I, like local government, have been financially profligate and cannot balance a budget even over the short term. Awaiting RBNZs call...

by B-practical_not_PC | 7th Apr 20, 9:57pm 1586253440

budgets have no meaning when you can simply borrow more to fund any variance. To many pies the council have their fingers in. Goff will milk rate payers without hesitation as did the other horny anglo face slapper. It's an opportunity for councils to exercise prudence and on behalf of all those who won't have a job yet still have to somehow find $ to pay his salary and reckless budget overruns.

by bw | 7th Apr 20, 7:15pm 1586243755

"Purchase programme (the ‘Programme’) had been successful to date in lowering government bond yields" + "The Bank had observed signs of increasing illiquidity and dislocation in the Local Government Funding Agency (LGFA) market in particular in recent weeks." = ?

So 2+2 = 5 in RBNZ thinking? To give an answer of 4 could mean that - "No one want to buy the paper or anything else when rates are so low." But that will never cross their minds. So, 5 it is.
Again. Good luck with all of this Adrian.

by waymad | 7th Apr 20, 7:44pm 1586245444

It's worth reading Michael Reddell's latest. His point is that there does not appear to be any overarching strategy here, let alone any released set of papers to support whatever passes for the latest move.

The Minister appears utterly unbothered by the high interest rates firms and households are paying, in a climate in which time currently has no (and probably negative) value. With a lockdown that, while far from total, is still more stringent than those in many countries, the economic dislocation is going to be enormous. And yet weeks pass and the government appears to have nothing systematic to offer.

And, further,

The bond-buying programme itself is nothing more nor less than an asset swap. The Reserve Bank buys government bonds on which it earns a yield to maturity probably averaging a bit under 1 per cent, and in exchange banks end up holding deposits at the Reserve Bank, currently paying 0.25 per cent. There is no particular expected value cost of that operation at all. What is drawing down New Zealand’s “current and future collective wealth” is the fiscal policy responses to the crisis, but they have nothing whatever to do with the Reserve Bank.

by The Lark | 8th Apr 20, 4:31am 1586277063

When people can't pay their rates, the council do have the right to take your house. It's sad, yet true. No need to worry though, the bank masters will have to be served before council has to be answered.
House freehold? No one in nz really owns their own house, the council are the end of the line, and should you fall too far behind, they will take you to court. But do not worry, the central govt will pay some company, to find some very special, and very expensive consultants to investigate the problem. People should have started paying attention to local rates a long time ago. Total council debt in nz is way out of control, hence the need to be saved by central govt. Unprecedented!

by Keen Observer | 8th Apr 20, 5:48am 1586281711

Sorry all folks, I advised them just the initial QE (bad enough).. sadly they're all got too much sub-conscious stake for the NZ FIRE economy,.. unfortunately they just did another/several other QEs, talking about 'knee jerk' reactions - This is the Achilles heel, to bring NZ in par with the rest of OECD economy in term of 'borrowing'.
Now, try to bring assurances? - watch, what will deflate from this month onward. - talking about the opposite effect.

by Doggog | 8th Apr 20, 7:41am 1586288516

Covid-19 is the start of a super debt reset. That process has already started through QE money printing on a scale never seen before. One can never be sure for certain, but I expect $100,000 worth of savings in the future will be like $10,000 today. Your purchasing power inflated away on a monumental scale!

by RickStrauss | 8th Apr 20, 9:26am 1586294766

Morally bankrupt central banking, eh. Destroy pensioners and savers to protect their own portfolios?

by Chessmaster | 8th Apr 20, 8:35am 1586291734

Show me the helicopter money !!!!!