Bond market experts generally aren’t concerned about the fact the Reserve Bank (RBNZ) will likely continue buying New Zealand Government Bonds (government debt) for some years, if not decades.
The current and former bankers and economists interest.co.nz spoke to recognised the RBNZ was never going to suddenly pull out of the bond market, having become such an active player from the time it launched its Large-Scale Asset Purchase (LSAP) programme in March 2020.
While some had criticisms of the LSAP programme, they didn’t believe the RBNZ continuing to buy bonds once the programme officially ends in June 2022 will pose new problems.
Rather, they recognised continued bond-buying is part and parcel of quantitative easing.
The important things remain, the decisions the RBNZ makes around monetary policy and how these influence retail interest rates.
By the RBNZ owning so many bonds, it has another tool at its disposal to set monetary policy, consultant and former investment banker, Raf Manji, said.
How the RBNZ gets there is a technicality those involved with the New Zealand bond market will have to deal with, ANZ senior strategist, David Croy, said.
Traders have experience in this area, with the Federal Reserve, Bank of Japan and European Central Bank among those to have done quantitative easing for some years.
Senior associate at Victoria University of Wellington’s Institute of Governance and Policy Studies, Geoff Bertram, had a different view. He believed the continuation of a flawed quantitative easing programme would only end in a train wreck.
A gradual and managed retreat - all going to plan
Going back a step, the RBNZ has bought more than $50 billion of mostly New Zealand Government Bonds on the secondary market since March 2020 in a bid to put downward pressure on interest rates and support smooth market functioning.
It’s committed to stopping these regular bond purchases in June 2022. The RBNZ has been buying fewer and fewer bonds every week. Next week it plans to buy $250 million of bonds - $100 million less than recent weeks.
But because the level of activity the RBNZ has in the bond market affects interest rates, it’s pointed out it likely won’t be able to spend the next 20 years letting its balance sheet shrink at the same rate all the bonds it’s bought mature. This would see it take its hands off the monetary policy wheel.
Rather, the RBNZ has been clear it will need to continue being an active player in the New Zealand Government Bond market.
Each time a bond the RBNZ owns matures, it will have to decide whether to let it drop off, or reinvest some, or all, of the funds it receives.
A partial reinvestment would still see the RBNZ’s balance sheet shrink. In theory, this would see it be a less active player in the bond market, which would put upward pressure on bond yields and thus interest rates.
Conversely, if the RBNZ figuratively printed money to grow its bond portfolio, this would put downward pressure on interest rates and be stimulatory.
The RBNZ noted that if markets get confused by all the levers it’s using to influence monetary policy, they might not respond the way it wants them to, thus potentially making its policy less effective.
What’s more, there are some risks associated with it holding bonds with long durations (some of the government bonds the RBNZ has bought will only mature in 2041).
Views from within the banking system
Manji said the RBNZ having additional monetary tools could help it control more of the yield curve.
The RBNZ’s head of financial markets, Vanessa Rayner, expanded on this point in a speech on Wednesday.
“All monetary policy tools have a common aim, but the transmission channels can differ,” she said.
“Balance sheet tools can work through different market channels as opposed to just reducing the risk-free short-term policy rate. For example: by reducing credit spreads and term premia (via LSAP); indirectly reducing the cost of other bank funding sources such as term deposits (via the Funding for Lending Programme); or clearing dealer inventories to improve market-making and supporting the market conditions necessary for monetary stimulus to transmit (via LSAP).”
Kiwibank chief economist Jarrod Kerr said ensuring smooth market functioning would be front of mind for the RBNZ when it eventually comes to making decisions around whether or not to reinvest the funds it receives when the bonds it owns mature.
ANZ’s Croy believed the RBNZ would be able to step back quite a bit. The Government will eventually be able to issue less debt, and because there is so much liquidity in financial markets looking for a home, there should be good demand for New Zealand Government Bonds.
Michael Reddell, who held a number of senior roles at the RBNZ, believed the management of its bond portfolio wouldn’t have a huge effect on retail interest rates. He said this was the experience in the US.
He questioned how the RBNZ would communicate how it intends to use its balance sheet as a monetary policy tool, in conjunction with other tools like the Official Cash Rate.
A view from outside of the banking system
Coming back to Bertram’s oppositional view, this stems from him being a proponent of money financing - the RBNZ printing money at the Government’s request and stimulating the economy more through fiscal policy.
Had the Government and RBNZ decided to take this less conventional route, the RBNZ could write off the debt and we could all move on, Bertram said.
He maintained this would be better than the current “charade”, through which the Government is effectively still financing itself.
This would prevent banks from clipping the ticket as the RBNZ buys the government bonds from them in a “money-go-round” that boosts asset prices rather than consumer inflation.
Bertram believed taxing wealth would be the best way of soaking up excess liquidity from the financial system. While he maintained this was fair and clean, he recognised it was “political poison”.