The Reserve Bank (RBNZ) is acknowledging quantitative easing (QE) has its limits, so is “actively” getting ready to venture into new territory to keep the economy buoyed.
It was only in March that the RBNZ launched its QE, or Large-Scale Asset Purchase programme, to lower interest rates and provide liquidity in financial markets.
It went down this path, recognising the Official Cash Rate (OCR) was already so low, the Bank didn’t have much room to cut it without going into negative territory.
Banks weren’t ready for this, so the RBNZ gave them until the end of the year to get their systems sorted. The possibility of a negative OCR has therefore always been on the cards.
However, the RBNZ, in its quarterly Monetary Policy Statement released on Wednesday, gave its most definitive signal yet that a cut was on the horizon.
Funding for lending ‘linked’ to lower OCR
For the first time it said its preference was to combine a negative OCR with the introduction of a new term lending facility, or “Funding for Lending Programme”. This would see it offer “low-cost, secured, long-term funding” to banks.
The RBNZ explained the programme would “lower bank funding costs, both directly and indirectly, by reducing banks’ demand for, and hence the price of, other sources of funding”.
“This would in turn help to lower the cost of loans for households and businesses,” the RBNZ said.
“Internationally, term lending programmes have also sought to directly encourage the supply of credit via including incentives for banks utilising the programme to expand their lending, providing additional stimulus to the economy.
“A term lending programme may be increasingly useful for supporting the pass-through of monetary stimulus if the OCR were reduced. The programme could help to ensure that bank lending rates remained responsive to declines in the policy rate even as retail deposit rates approached zero.”
RBNZ Governor Adrian Orr didn’t expect retail rates to fall below zero, noting banks still need to attract deposits.
The RBNZ reiterated guidance it gave in March that it would keep the OCR at 0.25% until at least March 2021. However, the likes of Kiwibank chief economist, Jarrod Kerr, believed it could move sooner, especially if New Zealand goes into lockdown for a longer period of time.
Bad Covid news didn’t influence QE expansion decision
Before jumping too far ahead, it’s important to acknowledge the RBNZ on Wednesday expanded and extended its QE programme fairly extensively.
It committed to buying up to $100 billion of mostly New Zealand Government Bonds (NZGB) on the secondary market by June 2022. Its previous commitment was up to $60b by May 2021. To date, the RBNZ has bought $23.7b of NZGBs.
Orr said news on Tuesday night of four people in Auckland getting Covid-19 from an unknown source had an immaterial impact on the RBNZ’s decision.
RBNZ Assistant Governor Christian Hawkesby said the QE programme still had a “a lot of ammunition” to further drive down government bond yields, and thus interest rates.
However Orr acknowledged diminishing returns would kick in. In other words, bond-buying might become relatively less effective the further into the programme the RBNZ goes.
To put extra pressure on yields, the RBNZ said it planned to “front load” the bond buying.
RBNZ’s bond buying cap increased to 60%
But as interest.co.nz wrote on Tuesday, the concern among some economists was that Treasury might not issue enough bonds to enable the RBNZ to buy as much as it wants to, while leaving half of the bonds on issue for other investors to buy, as per what was stipulated in an indemnity provided by the Finance Minister.
To get around this cap, implemented to avoid the RBNZ distorting the market, the Finance Minister changed the indemnity to enable the RBNZ to buy up to 60% of the bonds on issue. He did this on August 9 - underscoring the fact the extension to QE wasn’t a knee-jerk reaction to Covid-19 being found in the community.
Asked whether he was worried the Government wouldn’t issue enough debt for the RBNZ to buy, Orr said: “We can only play the hand that’s in front of us at any point in time. The choice of instruments [like QE, the OCR, etc] will certainly be a function of the options that are available and operational capacity to achieve that...
“That is very much why we emphasise the separation between fiscal policy decisions and our independent role around maintaining monetary conditions.
“It’s also why we continuously talk about additional monetary instruments and the preparedness and operational capability to implement those.”
Asked what had changed for the RBNZ to feel comfortable owning up to 60% of the NZGBs on issue, Hawkesby said 50% was always a “ballpark figure”, which was in line with what other countries had done.
He said it was more important to look at the size of the QE programme in relation to the size of the economy, as opposed to focusing on the portion of bonds bought by the RBNZ.
RBNZ not considering yield curve targeting or writing businesses loans direct
Hawkesby was clear he wanted government bond yields to be lower, but Orr said the RBNZ didn’t have a target in mind. He said having a target, like his Australian counterpart, wasn’t on the cards, but he wouldn’t rule it out.
Orr said buying foreign assets was low on the RBNZ’s priority list.
As for the RBNZ giving businesses loans directly, he believed this was unnecessary. Even though banks are tightening their lending to certain business customers, Orr’s preference remained the negative OCR/term lending facility duo.
It’s worth noting the RBNZ launched several facilities during the initial Covid-19 outbreak to provide liquidity to financial markets in exchange for collateral, to support market functioning and the Government’s Business Finance Guarantee Scheme.
Yet the uptake of these schemes has been low, in part because of a lack of credit demand. Businesses are being cautious and drawing down on their existing credit lines. This could change come 2021.
Would even lower cost debt be stimulatory?
Asked how he could be confident helping banks offer customers even lower cost loans would encourage more lending and be stimulatory, Orr said: “We’ve long said we can’t force people to borrow and we can’t force people to lend…
“What we want to do is make sure that we can facilitate - at the lowest possible level of interest rates - those transactions.”
Orr reiterated that it was time for banks to dip into their capital buffers.
He then talked about fiscal policy (IE government spending on schemes like the wage subsidy) being “the most direct, front of stage” type of stimulus.
Rather than giving households and businesses an incentive to invest, he said fiscal policy saw that investment executed directly.
RBNZ chief economist Yuong Ha pointed out that while low interest rates might not encourage a whole heap of new borrowing, they ease debt servicing costs, which has a “positive cashflow impact”.
Orr noted the significance of this, given how much mortgage debt households have.
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