Reserve Bank (RBNZ) Chief Economist Yuong Ha has clarified quantitative easing might be with us for some years.
Speaking to interest.co.nz, he explained there might not be an abrupt end to the RBNZ’s bond buying when its Large-Scale Asset Purchase (LSAP) programme ends in June 2022.
If, after June 2022, the RBNZ decides it needs to keep monetary conditions stable, it could buy new bonds when the bonds it owns mature. This would see it keep its balance sheet the same size.
If the RBNZ seeks to tighten monetary conditions/increase interest rates, it could sell some of the bonds it owns or not replace matured bonds with new ones. This would shrink the size of its balance sheet.
And if the RBNZ decides it needs to loosen monetary conditions/lower interest rates, it could buy more bonds and thus increase the size of its balance sheet.
A few ifs and buts
While this is how things could work in principle, Ha said the RBNZ would also need to consider how well the bond market was functioning, and how many bonds the Government was issuing.
He explained, if the market was functioning well and The Treasury decided to issue less debt than forecast at the Budget, then the RBNZ could reduce its bond holdings to maintain the same relative share of the bond market. This wouldn’t significantly alter the degree of monetary stimulus provided.
Since the RBNZ launched its LSAP programme in March 2020, it has bought $51.7 billion of New Zealand Government Bonds and $1.7 billion of Local Government Funding Agency bonds on the secondary market. The central and local government debt it owns is an asset on its balance sheet.
The RBNZ has done the bond buying to lower interest rates to boost inflation and employment.
While the RBNZ is projecting it’ll be able to start moving away from its emergency monetary policy settings by hiking the Official Cash Rate (OCR) from mid-2022, Ha said “time will tell” what will happen with the bond buying.
He said the RBNZ would “maintain” the size of its balance sheet as at June 2022.
“Eventually, when we normalise - touch wood we get there sooner rather than later - we may look to scale back our balance sheet,” he said.
How winding back the LSAP might work with possible OCR hikes
Ha couldn’t say whether the RBNZ would start hiking the OCR before its LSAP programme and Funding for Lending Programme (FLP) are due to stop in June 2022.
In other words, he couldn’t say whether the RBNZ would seek to hike interest rates via the OCR, all the while continuing to try to put downward pressure on rates via bond buying and by providing banks with cheap funding.
Asked how wedded the RBNZ was to continuing bond buying via the LSAP until June 2022, Ha said: “The Monetary Policy Committee [last Wednesday] reaffirmed that we want to continue with the LSAP programme. We’ll get to reaffirm that every six weeks. Until that position changes, it remains in place.”
ASB economists maintain the RBNZ will stop bond buying early, ahead of hiking the OCR in May 2022.
They are among those who brought forward their projections around when the RBNZ will start tightening monetary conditions, further to interpreting its latest Monetary Policy Statement as hawkish.
Indeed, government bond yields, swap rates and the New Zealand dollar have risen since last Wednesday.
A reminder OCR hikes in 2022 aren't a sure thing; Market reaction to MPS described as 'interesting'
Asked whether this is how he expected the market to react, Ha said: “It’s an interesting reaction, isn’t it?
“If you look at the underlying message that we were portraying - it was well in line with the vast majority of expectations around our policy message…
“The new information was, we went back to publishing this OCR track that we’d gone away from for the better part of the last 12 months. So that, I guess, was news. And rightly so, markets have tried to digest what that means. We’ve tried to say, think back to the pre-COVID days when we published an OCR track. It was always a highly conditional path.”
See the video interview for more on the RBNZ's view around where inflation is expected to come from domestically without high levels of immigration, house price and tourism growth, and why the RBNZ isn't moving quicker to provide detailed analysis of the distributional impacts of loose monetary policy.
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