It won’t be long before Treasury and the Reserve Bank (RBNZ) enter taboo territory and work together more closely to keep the economy afloat.
This is the view of Sean Keane - the founder and managing director of Triple T Consulting, who is also a Jarden non-executive director and former Credit Suisse Asia-Pacific managing director of global money market funding and short-term interest rate trading.
Wearing his Triple T hat, Keane believes the RBNZ will keep buying New Zealand Government Bonds on the secondary market, as it currently is under its Large-Scale Asset Purchase, or quantitative easing, programme launched last month.
But in the “near future” it will follow the Bank of England and Bank of Indonesia and additionally buy bonds directly from Treasury.
The end point would be the same, regardless of whether the RBNZ buys bonds direct, or from banks and other investors that already own them - the Government raises money and the debt goes on the RBNZ’s balance sheet. The difference is that cutting out the intermediary saves taxpayers money.
Period of peak central bank independence has passed
While neither RBNZ Governor Adrian Orr nor Finance Minister Grant Robertson have said they intend to do this sort of direct financing, they haven’t taken it off the table either.
Orr recently said he would remain “open-minded” to the concept, while Robertson a fortnight ago told interest.co.nz it was being kept “under review”.
Robertson said if there comes a time the market can’t absorb all the New Zealand Government Bonds being issued, then “of course” he would look at the RBNZ buying the bonds directly from Treasury.
Keane maintains it’s significant Orr hasn’t clearly ruled out broaching the revered moat that separates the central bank from the government, as his Australian counterpart has.
“Orr certainly has a reputation as a central banker who is prepared to try new things, and who does not feel constrained to obey past norms or principals. In the current environment therefore, it is worth paying close attention to what the Governor is saying,” Keane said.
For some time now, he’s believed “the period of peak central bank independence” has passed globally.
“Central banks are operationally independent only to the extent that their people wish them to be so, and the degree of independence that is granted changes with economic and political cycles,” he said.
RBNZ should buy bonds at market rates
So, how would Treasury and the RBNZ go about direct financing, without losing their credibility and ruining pricing tensions in the bond market?
Keane explained: “The RBNZ could buy bonds directly from the Debt Management Office [which is part of Treasury] by announcing prior to each auction the amount of bonds that it is willing to purchase in the tender.
“The DMO would carry out its tender as usual, but the offer of bonds to the street would be reduced by the amount reserved for the RBNZ.
“The tender process would remain market competitive and the rate that the RBNZ would buy at would be the same as the issuance rate set at the market tender.
“There are three benefits that go with this approach:
- “The RBNZ is transparent in announcing its intentions and revealing its actions
- “The rate at which the government (DMO) transacts with the RBNZ is determined independently by the market and can therefore be considered fair and reasonable
- “The cost to the NZ taxpayer is reduced by the fact that two different parts of government are not paying away the bid/offer spread to the market.”
Motive needs to be boosting inflation, not funding the Government
Keane said the Monetary Policy Committee would have to be clear it’s doing this form of QE to meet its mandate of keep inflation between 1% and 3% and employment at a maximum sustainable level - not to finance an increased government borrowing programme.
He also believed it was important for it to continue buying bonds on the secondary market. Under its current programme, it has committed to buying up to $30 billion of New Zealand Government Bonds and $3 billion of Local Government Funding Agency bonds.
Keane said the market has responded quite positively to this. Investors have continued to buy government bonds because they can be confident there’s a buyer for these bonds - namely the RBNZ - should they wish to on-sell them.
“There may be some market pullback if the RBNZ is no longer directly active in the local bond market,” Keane said.
“For that reason, it would be appropriate for the RBNZ to continue executing some portion of its QE program on-market, thus maintaining the focus of the dealer community and the support for bond prices.”
The RBNZ is expected to comment on its direction of travel on QE on May 13, when the Monetary Policy Committee releases its next quarterly statement.