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Adrian Orr: More QE would be the 'simple' way for the Reserve Bank to boost the economy; Going further and getting the Bank to directly finance government initiatives would be ‘achievable’ 

Adrian Orr: More QE would be the 'simple' way for the Reserve Bank to boost the economy; Going further and getting the Bank to directly finance government initiatives would be ‘achievable’ 
Adrian Orr, by Jacky Carpenter

Reserve Bank (RBNZ) Governor Adrian Orr confirms more quantitative easing (QE) is likely to be the central bank’s first point of call, should it need to do more to stimulate the economy.

Orr says the RBNZ would “probably” stick to buying no more than 50% of the New Zealand Government Bonds in the market, even though this isn’t a “magic number”.

The RBNZ’s Monetary Policy Committee last week nearly doubled its QE, or Large Scale Asset Purchase programme. In doing so, it committed to buying up to $60 billion of mostly New Zealand Government Bonds from bond holders (banks, fund managers, etc) over the next year.

But with the global economic outlook remaining dire, and the RBNZ forecasting a brief period of deflation next year, the central bank may need to do more to meet its inflation and employment targets.

‘Ongoing large-scale asset purchases would be a very simple story’

Asked by what would be the next step, Orr said: “The first question is, would we need more stimulus? We’ve got a long run-up at the moment. We’ve got a cap of $60 billion of purchasing to do between now and this time next year. We’re well short of spending that…

“We would continue to see how effective that [QE programme] was. If it remained effective, then ongoing large-scale asset purchases would be a very simple story, subject to the markets functioning well…

“If we thought that was exhausted or not achieving what we wanted, there’s foreign asset purchasing, there’s forward guidance with us operating in the market to show our commitment, and there’s term lending where we are providing banks low-cost fixed-term loans for them to be on-lending to customers.”

Orr said the QE programme had been “highly effective” in lowering wholesale interest rates. It was also “complementary to the Government’s fiscal policy”. In other words, the programme means there’s a buyer of the wad of bonds the Government is throwing into the market as it takes on a huge amount of debt to pay for the COVID-19 response.

“One of our concerns way back was we wouldn’t have enough assets to purchase,” Orr said.

“But given the nature of this shock and the fiscal expansion that’s going on - appropriately, it has meant that we’ve had plenty of assets to purchase while maintaining our operational independence. So, it has been a good outcome. There’s more depth and more breath - other assets. We feel pretty confident where we are on this.”

Economists believe more will be needed

ANZ and Westpac economists are among those who believe the influx of New Zealand Government Bonds to the market further to last week’s Budget, will prompt the RBNZ to increase its QE programme from $60 billion to $90 billion by August.

What’s more, if the RBNZ keeps buying bonds at the rate it’s going, it’ll hit the $70 billion mark in a year.

Westpac economists are also concerned the RBNZ’s using an “unrealistic” assumption that the exchange rate will fall and stay low for years. Without more QE or a negative Official Cash Rate (OCR), they believe the exchange rate is more likely to rise, which will hurt New Zealand exporters.

Money financing ‘different’, but ‘achievable’

Looking at the way the RBNZ executes its QE programme, Orr reiterated what both he and Finance Minister Grant Robertson have said in the past - that the RBNZ will only buy bonds directly from Treasury if the secondary market is dysfunctional, which it isn’t at the moment.

Orr said it was up to government to decide if it wanted to go further and give the RBNZ the mandate to buy bonds for fiscal policy purposes, rather than monetary policy purposes - IE buy bonds to help pay for government spending initiatives rather than to keep inflation and employment in check.

“There’s no right or wrong,” Orr said.

“It’s just that it is different and you would need legislative and/or institutional instructions, because when I last looked at my job description, I’m not allowed to go off and buy whatever I feel like because I’ve got the ATM…

“That would take some significant transparency as well as operational structures to ensure everyone knew who was doing what, why, how, where, when.”

Asked whether he would be hesitant to go down this path if Robertson asked him to, Orr responded: “Yes, I mean, it really depends to what purpose… and under what conditions is this managed.

“Because you could take it to the extreme immediately and you’ve gone back in time 30, 40 years and the central bank is being used as the ATM for a government and it’s unclear whether we can control inflation anymore, and it’s back in the hands of the elected officials…

“It’s not for me to choose the policy. I would implement the policy, but I would be extremely cautious about making sure the risks are understood, managed and mitigated wherever they could be.

“And I imagine I would be surrounded by many many people with free and often unsolicited advice around whether it did or didn’t work… which is good…

“People are very passionate about the structures that have been built and you don’t muck around with them lightly.

“These things are achievable; they’re just different.”

It might take an OCR cut below -1% for retail banks to start charging depositors

Jumping back a step, the RBNZ in March committed to keeping the OCR at 0.25% until at least March next year to give banks time to get their computer systems and legal documentation ready to cope with negative rates.

Banks have been asked to be ready by December. Westpac economists, who had thought the RBNZ could cut before then, have changed their minds further to the RBNZ's commentary being more definitive this week.  

Orr said a negative OCR could be “efficient” and “effective”, but there was a “limit” to what it could do.

He said it was “very rare” to see negative retail interest rates because there’s a limit to how much depositors are prepared to pay to keep their money in the bank. 

Asked how low the OCR would need to fall for negative rates to filter through to banks’ retail customers, Orr said at least south of -1%, assuming banks’ margins remain the same.

“[Banks] would do their very best to carry on and be normal; keep their margins,” Orr said.

Weakening the dollar with a FX intervention could be ‘short-lived’

As for going down the path of buying foreign assets like US Treasury bonds, Orr said: “The biggest criticism of foreign asset purchasing is that it can be called FX [foreign exchange] intervention and everyone has a view of how effective or ineffective it is.

“What we’re talking about is you might want to just increase the total level of foreign assets on our balance sheet as another way of creating liquidity. But with those foreign assets you get a different risk premia.

“FX intervention is where you come out all guns blazing, swinging and kicking and claiming you’re going to be standing in front of the market, buying foreign currency. We’ve seen through time that that might lead to a depreciation of your currency, but that could be very short-lived.

“The more we sell kiwi and buy foreign, the more downward pressure we’re putting on our New Zealand dollar. That’s a good thing. It means exporters are earning more. It’s another monetary policy channel.

“But it’s not one that you can easily influence because of the depth of the foreign exchange markets. They are very large markets. You don’t want to stand in front of them. You want to work with them.”

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Come on, this is sleight of hand. Von Papen came unstuck doing something similar.

You haven't noticed before, commentary from banks economists is largely self serving.

Bank chief economists need to be chief salespeople, who's primary function is to keep lending margins fat. Adrian Orr job is to keep these banksters honest, if that is possible when they have the gun.

Sounds like he's digging us into a massive hole just because he doesn't want to admit he's wrong. Reports of his behaviour over the last couple of years suggest that emotional profile.

Not sure I agree. I think he's communicating that everything is under control. These people really live in an alternate universe.

The lack of readiness on the part of banks for a negative OCR is really lame.

Negative OCR is a much better tool.
QE only helps people who own something, such as mortgaged house or businesses with debt, therefore does not promote equality.
What QE does to people who has little assets is cruel, they have to suffer from higher house rent, inflation, and actual deduction of pay rate.
Plus, QE questions the validity of the financial system in general.

And how does negative OCR help those that don't own a mortgaged house or business with debt?

Rubbish, -ve OCR just destroys the bond market and you have a central bank that HAS to BUY ALL bonds in then end.
Has it ever worked just ONCE ?
Look at Europe with 12 years, no one will touch the bonds. Look at Japan, dead ducks and can't get out.

As we saw before our QE started a negative OCR counts for nothing if NZGB yields rise anyway. The Friday before we started QE the 10 year yield was 1.7% with the bond auction about to settled at 2.2%. I would think the banks would be rising mortgage rates by now if the RBNZ had not intervened.

Yes QE is printing as it can never be undone without crashing crashing the housing market but with every central bank doing this no one really cares.


Newbie... do please tell me how the QE gets from the Central Bank to the citizen?

Go and look at the first 3 years post-GFC in the countries that issued QE. Look at the bank reserves and then look at the asset prices and mortgage market. QE does not lead to asset inflation **unless and until ** retail banks lend freely and/or people have the income. Do you see banks lending freely in the worst economic disaster in a century? Really? This is why Orr is constantly trying to jawbone the banks and telling them to be brave and kind and all kinds of nonsense that banks have no business being. Banks are businesses, like every other business they will be assessing risk and positioning themselves conservatively until the future starts to look a bit brighter.

Excellent - telling it how it is - lower interest rates mean bank lending is tight, while the taxpayer gets to fund increasing amounts of floating rate base money (reserves) locked on the RBNZ balance sheet until OE purchased government debt is redeemed or sold.

I'll do him a deal - he pays down my mortgage at 150% and I'll use the balance to spend like hell.


How many times do we have to say it!
It's not Stimulus!
It's a bail-out at best and will do NOTHING to stimulate the economy; an economy that's been progressively killed off by past failed efforts at 'stimulus' and more of the same just sounds the death knell for what's left of it.
More debt, whichever magic wand Orr wants to wave, isn't the answer. Better use of what massive amount we already have, is.

The RBNZ has not doubled "QE"
It has simply jaw-boned the market by announcing it CAN run QE up to $60 bn

They're running at a pace of about $70+B p/a

Yes. Confidence tricks.

Destroying the banking industry

But do the banking industry deserve any better considering their long history of screwing New Zealand?

Depends, they could take a lot of us with them if it all goes pear shaped. And I wager they are better at getting the ear of the ministers and agencies than John Q Mortgageholder, Esq.

Isn't the OBR policy designed to prevent bank failure?

So far it's all hot air
A "retail bank" or "registered participant" can buy Government Bonds off Treasury when the Treasury does an issue. The "retail bank" has to bid for them. Say it successfully bids for $100 million worth at $105 million. Then the RBNZ comes along and buys them on-market from the retail-bank for $110 million 14 days later. That's a profit of $5 million in 14 days for a 5% profit, at an annual rate of 130%. So they do that again, and again, and again ad-infinitum

While the funds of the The "Retail Bank" are tied up in bonds on their balance sheet they are not cash. But once the RBNZ buys them they become cash in the hands of the Retail Bank and sit on their RBNZ bank account as cash.

What they don't tell you is where the original $100 mln came from nor what incentive there is for the "Retail Bank" to get that cash out into the hands of borrowers. Why would they when they can wait for Treasury to sell some more bonds and make a lot more risk free profit courtesy of the RBNZ

Exactly. And not to mention all this (or very similar) happened across the world after the GFC and most of the "QE" just sat in reserves for ages not going anywhere near most borrowers, while there was an almighty credit crunch.

Not quite. In the US there was a quid-pro-quo where QE was "mostly" transacted with merchant-banks who were implicitly required to support the stock-market by buying shares with the proceeds. That's the main reason Goldman-Sachs was annointed with "bank status" so it could participate. Warren Buffet promptly bought 5% of Goldman Sachs. None of that $4 trillion QE ever reached main-street

Good point.

Banks don't lend their reserves out except to another bank or they can buy government bonds with them, they have no other options. All bank lending is made by creating money. Where did these bank reserves come from in the first place? the government created them through its spending, only the government can create bank reserves.
Orthodox economist don't have a clue as to what is happening at present, only MMT has an accurate explanation for what is going on.

Yeah but aren't the reserves supposed to make the retail banks feel all warm and fuzzy about creating the money/issuing loans, that the higher reserves lower their risks? Or have I got that wrong?

They have interest rate risk - if cash rates go negative, bank profits get hit.

Remember that all QE does is move inflation from the future the present. This is because the returns go to RBNZ and not back into the wider economy.

If we where on a trajectory of low inflation prior to this crisis we will be in a trajectory of deflation going onwards.

Flips his mind a bit. He's said in past negative OCR was his choice.

“The more we sell kiwi and buy foreign, the more downward pressure we’re putting on our New Zealand dollar. That’s a good thing. It means exporters are earning more. It’s another monetary policy channel."

He got some stocks in dairy or agriculture? This kind of policies never worked for developed economies. China and many others used to play this game but learned the hard way when their economies get developed. Exporters can export more but NZ is a net importer of every other thing with financial services making the bulk of the economy.

Thou the citizenry shalt pay for it.

The high NZD has been the only insulation NZers have had against increasing living costs in a country with stupidly high house prices, rampant ticket clipping on consumer goods and low wage growth.

But sure, the loss of that as a buffer is a "good thing". What a stunning thing for an RBNZ Governor to say.

"He said it was “very rare” to see negative retail interest rates because there’s a limit to how much depositors are prepared to pay to keep their money in the bank. " How about nothing?!!! Having to pay to put money is a bank is nothing less than extortion and theft! It utterly denies the purpose and point to having banks. The banks not paying interest to depositors now is already pushing that boundary, to make it worse will drive a collapse of the economy, and see the Government booted!

I completely agree. I suggest you do what I have started doing in the last couple of months: move your money out of the NZ banks.
Other countries pay very low interests too, but at least they have a deposit guarantee. I am not going to subsidise the fools who believed in the housing Ponzi scheme, and underwrite their risk for a pittance. They made their bed, and now they are going to have to lie in it.

Whole QE thing reeks... should be illegal. I think it will eventually undermine the NZ dollar.

They are just importing future inflation into the present. Eventually rates will get to 0 across the curve and there won't be any more inflation to import. Then they need to get creative.

Alas all the gains made in Kiwisavers, over the last decade will be eventually wiped out not by the virus induced business turmoils and market collapse, but by the viri of Quantitative Easing forced upon thee.

Be prepared to work till your 80s. Retirement is now a thing of the past.

Sell the NZ dollar and buy foreign to improve our terms of trade! What Japan did prior to the plaza accord. What China did and does by various means. What German did and does. What is enabled by the US finance and banking system under pinned by the Federal Reserve. The so called exorbitant privilege that resluts in massive trade deficits lost jobs and demand in exchange for foreign credit? As if there was any shortage of credit in the US invest in what? When you've exported all your jobs and demand. Unidentified really approved by the liberal post war consensus. The risk was someone like Trump spots the problem and gets elected. Well here are. Not the that little ol NZ will make any difference jumping in so late in the game. But an interesting historical process to reflect upon.

Money printer goes brrrrrrrrrrrrrrr.

Orrrrrrrr gotta get those property prices up.

Hi everyone. I am new to this topic and would appreciate your help in understanding how this QE works. It seems to me that the RBNZ buys assets from the financial sector, principally retail banks and they use the cash to buy Government treasury bonds which gives cash to the Government so it can pay for its infrastructure programmes. Along the way the retail banks are cleansed of underperforming assets and make a margin if they sell the treasury bonds back to the RBNZ. Question, where does the RBNZ get the funds in the first place? Are these borrowed or just created? If borrowed, who from?

In the simplest terms the government can borrow money just like you or I or other fictitious entities like companies, except the loan is for very large amounts and take the form of government bonds instead of mortgages student loans, vehicle finance or overdrafts like we are used to. In effect new money has been created just like any loan. And has a coupon or interest and is expected to be paid back.
When the RBNZ prints money it creates new money that does not need to be paid back. This increases the so called base money supply. It's pretty simple to do. Its stated in advance to warn markets. There is a resolution to do so by authorized persons. A bit a paper is signed by someone important. The bit of paper is taken down to the typing pool and someone known for accuracy types the big number into the account balance for the government at the RBNZ. Done. Sovereign powers used to create new sovereigns.

It's worth mentioning that companies do it too. When they issue new stock they dilute the existing shareholders. If there is a high level of trust in management and the money can be used to boost growth and sales the company share price might rise. If the company is on its last legs and has negative revenue the share price will fall. The principle is very similar and is used effectively all over the world to enrich company executives....

No - money has not been created. Government bonds are an IOU and are monetised when bank depositors exchange their savings for government bonds - the government then spends those savings into the system as any other depositor does. Banks have to create new loans by buying new borrowers' IOUs with their own IOUs, which represent further savings which the government can access by exchanging more bonds for them.

The RBNZ buys these bonds by swapping them for base money (reserves) which have to be held at the RBNZ by banks (savers) until the RBNZ sells them or Treasury redeems them and pays the banks back via the RBNZ - furthermore the government swaps fixed rate bond liabilities for floating cash rate equivalents. Which presents a higher risk profile for the tax payer going forward.

Ummm ok.

Imagine my dog takes a crap on your lawn. Initially you’re annoyed, but then I convince you that the dog turd is actually modern art work, like a canine Banksy. You agree to buy the dog turd for 1 million dollars. So my equity increased by 1 million dollars and you have assets and liabilities of 1m, the liabilities came because you borrowed 1 m from a bank to buy the dog turd. Suddenly you realise the dog turd is worth nothing. Banks around the world realise that money has been loaned to buy a worthless dog turd and they all put up their interest rates because they know for sure that somewhere someone’s going to default on a huge loan. At the last minute the central bank agrees to buy the dog turd at face value from you. The central bank now has a 1 million dollar dog turd on the assets side of it’s balance sheet. Everyone is happy. I’ve got 1 million of profit / Equity. You’re back to where you started. Interest rates have come down because nobody's going to default anymore. Of course I now have 1 million of increased equity that I can use to purchase real assets like real estate, gold, businesses etc. That's my tongue in cheek interpretation of QE.

Try this article from Prof of Economics Bill Mitchell.
Basically it goes like this. Government spending creates bank reserves, bond sales reduce bank reserves, QE increases bank reserves again. Mostly it is done as a means to control interest rates, borrowing never actually funds the government as the government creates new currency when it spends which is what created the reserves in the first place.

Except the whole market has not been left alone to find an equilibrium its been manipulated. Interest rates have been directly controlled and it has stuffed the housing market and created a massive bubble. Covid came along and created problems outside of the control monetary policy.