RBNZ would rather set monetary policy using the OCR than by buying/selling bonds

Bonds

The RBNZ is fixed on using the OCR to eventually tighten monetary policy, and is in no rush to do so by shrinking its $54 billion bond portfolio

19th Aug 21, 7:32am by Jenée Tibshraeny

The Reserve Bank (RBNZ) has affirmed its intention to use the Official Cash Rate (OCR) to adjust monetary policy, ahead of doing a lot of bond-buying/selling.

The Monetary Policy Committee said in its statement on Wednesday, “the OCR is currently the preferred tool to adjust the level of stimulus in the economy”.

It said the OCR is a more “flexible” tool, which can be “adjusted more frequently and calibrated more precisely according to the level of monetary stimulus required”, than the RBNZ’s Large-Scale Asset Purchase (LSAP) and Funding for Lending (FLP) programmes.

The Committee said the LSAP and FLP, which have been putting downward pressure on interest rates, are “geared towards providing stimulus for a sustained period of time”.

It noted that even though the RBNZ is no longer buying bonds via the LSAP, “the associated balances in the settlement cash system will continue to provide stimulus”.

In other words, stimulus is still being provided by the $55 billion that the RBNZ effectively printed to buy mostly New Zealand Government Bonds from banks and fund managers between March 2020 and July 2021.

What’s more, banks have until December 2022 at the latest to keep securing cheap funding from the RBNZ via the FLP. To date, they’ve borrowed nearly $5 billion of “newly printed money” via this programme.

Accordingly, the Committee said that when the RBNZ tightens monetary policy, “the OCR will need to be higher than otherwise to achieve a given overall level of stimulus”.

No rush to sell bonds

The Committee’s preference for using the OCR was also underlined by its acknowledgement the RBNZ doesn’t yet have an “operational strategy” for managing the $54 billion of bonds currently on its books.

The Committee directed RBNZ staff to create such a strategy.

RBNZ Governor Adrian Orr said, in a press conference, details would be unveiled in “coming months”.

But Assistant Governor Christian Hawkesby signalled the RBNZ probably wouldn’t try to tighten monetary conditions by actively selling its government bonds - anytime soon at least.

“We’re conscious that we need to communicate to the market what our intention is with our balance sheet and with those schemes,” Hawkesby said.

“The main practical decision ahead of us is the maturity of the 2023 bond, and whether we reinvest some of our current assets once those mature.

“That gives us plenty of time to outline a plan ahead of that.”

In other words, Hawkesby said the RBNZ was focussed on the extent to which it’ll buy more bonds once those it owns matures, to manage the rate at which its balance sheet shrinks/the stimulus it has provided is removed.

Asked to clarify whether the RBNZ was unlikely to start actively selling bonds before 2023, Hawkesby said, “We will outline our plan in the period ahead.

“Globally, we haven’t seen any central banks actively sell their assets back into the market. They’ve typically not reinvested maturing assets.

“For us, we need to go back to first principles and base it around; what are we trying to achieve with the stance of monetary policy?... And how can we do that in a way that’s supportive of market functioning?”

Hawkesby’s comments align with those RBNZ chief economist Yuong Ha made to interest.co.nz in June.

Ha explained how the RBNZ will need to keep managing its balance sheet for decades to come, keeping in mind the fact the longest dated bond it owns matures in 2041.

‘Significant’ economic U-turn would be required for RBNZ to loosen monetary policy

What if the Covid-19 situation worsens, and the RBNZ is faced with a situation where it needs to loosen monetary policy?

The Committee didn’t mention the possibility of doing so specifically by re-starting weekly bond purchases.

The Committee recognised: “A monetary policy response may be required if a health-related lockdown has a more enduring impact on inflation and employment.”

But a hawkish Orr said in the press conference, “We started a path to less stimulatory conditions in July by halting our LSAP programme, and that is our plan going forward.

“Very clearly, in the document, we would have to see significant different outcomes - in particular to demand - to change our mind.”

What’s more, the Committee talked up the value of fiscal policy (government spending and transfer payments), saying this has “proved to be a very effective tool to respond to any immediate reduction in demand in the event of outbreaks”.

Robertson: No need for the Government to up its debt issuance

Finance Minister Grant Robertson on Wednesday confirmed he doesn’t believe the Government needs to borrow more to cover the cost of the Wage Subsidy and other government support being offered due to this Delta outbreak.

As at July, the Government had nearly $38 billion in its bank account with the RBNZ, known as the Crown Settlement Account.

This is a very high balance, indicating the Government has been borrowing at a faster rate than it’s been spending.

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49 Comments

by waymad | 19th Aug 21, 8:55am 1629320150

Micheal Reddell, he of Croaking Cassandra, avers that all the LSAP has achieved is a swap of maturities, and a definite exposure to risk, with a liability in the low billions to the NZ taxpayer. It's way above my pay grade to comment further...... here's MR:

every day the Bank holds the bonds the taxpayer is exposed to unnecessary market risk (remember that they have lost us $3 billion or so to date), and there is no obvious good reason for the central bank’s balance sheet to be as bloated as it is for any longer than is strictly necessary.

And the link:https://croakingcassandra.com/2021/08/17/looking-towards-the-mps-2/

by Jonny.Foe | 19th Aug 21, 10:30am 1629325839

Sharon Zollner talked about this too. The $3bn has not been 'lost' - it is a liability allowance on the balance sheet (i.e. to cover a forecast loss). The financial risk has been caused by RBNZ buying bonds and placing circa $50bn into bank settlement accounts. If OCR increases, the interest payable on these settlement accounts normally increases accordingly. So a 1% increase in the OCR would mean paying an extra $0.5bn of interest on the $50bn. Now imagine that you had a $50bn 'debt' and you alone could decide the interest rate payable on that 'debt'. Would you choose to put the interest rate up so that banks with $6bn of NZ profits could get more free money?!? Nah.

by Audaxes | 19th Aug 21, 10:36am 1629326217

I thought he (Reddell) was referring to the RBNZ paying above par (the redemption price) for bonds now residing in it's portfolio.

by Jonny.Foe | 19th Aug 21, 10:43am 1629326583

I saw a twitter exchange on this and my read was that the liability was (i) interest on settlement cash + (ii) over par paid + (iii) potential loss if bond value decreases (yield increases). Surely the 'over par' bit is the weakest of those three factors given that the whole point of LSAP was to hold prices up and yields down. I would be interest in a less biased assessment of the net impact of RBNZ holding bonds - given that Govt must be saving around 3% in yield payments.

by Audaxes | 19th Aug 21, 11:07am 1629328046

...given that Govt must be saving around 3% in yield payments.

~.3.0% is the current estimated coupon cost of the government's outstanding bond and TBill liability (~ $144,171.42 million).

Hence the RBNZ is probably not incurring a current loss from the 0.25% OCR payment on bank settlement cash balances.

by JustAnOpinion | 19th Aug 21, 12:21pm 1629332480

The avoidance of greater public debt due to interest is simply moving it into private debt as the lower interest rates continue the exorbitant debt loading of the private sector. This will compress demand and the gap between the ability of people to debt load will forever exceed their ability to pay it back. Death's sweet release will be the only door through which debt can be escaped.

by Fairlyfrank | 19th Aug 21, 8:59am 1629320399

Well I am surprised fancy using the OCR to adjust monetary policy who'd of thought that could be done !!! How much do these people get paid .

by Jenée Tibshraeny | 19th Aug 21, 1:55pm 1629338133

The point I tried to highlight was that the RBNZ has been using a few different tools to loosen monetary policy (lowing interest rates). So when it comes to tightening monetary policy (raising interest rates), there are a number of ways it can do this. What the RBNZ has said is that its preference is to use the OCR tool - for now at least. It has indicated it isn't going to try to reduce the stimulus it's provided to the economy by selling a bunch of the bonds it owns.

For someone with a mortgage or term deposit, who isn't particularly interested in financial markets, it won't matter so much how the RBNZ is going to eventually increase interest rates. This is what this article addresses.

The most useful thing for them to know is that before Delta came along, the RBNZ was hawkish and was very keen to increase interest rates relatively quickly. The initial story David Hargreaves did on the Monetary Policy Statement covers this off well.

Hope that helps. Sorry if I'm explaining something you already understand, or if on the contrary, the article is unclear or too confusing.

by Audaxes | 19th Aug 21, 9:34am 1629322465

It noted that even though the RBNZ is no longer buying bonds via the LSAP, “the associated balances in the settlement cash system will continue to provide stimulus”.
In other words, stimulus is still being provided by the $55 billion that the RBNZ effectively printed to buy mostly New Zealand Government Bonds from banks and fund managers between March 2020 and July 2021.
What’s more, banks have until December 2022 at the latest to keep securing cheap funding from the RBNZ via the FLP. To date, they’ve borrowed nearly $5 billion of “newly printed money” via this programme.
Accordingly, the Committee said that when the RBNZ tightens monetary policy, “the OCR will need to be higher than otherwise to achieve a given overall level of stimulus”.

Other than the fact the RBNZ will have to pay the banks more on their QE enlarged settlement accounts at the RBNZ, only to be offset by being in receipt of the same on FLP balances, do you have any concrete examples explaining how these balances are stimulating our economy?

by Squishy | 19th Aug 21, 9:32am 1629322350

I don't think it particularly matters. If they keep going the direction they have done in a couple of cycles Reserve Banks will run out of debt and equity instruments to buy.

by brisket | 19th Aug 21, 9:46am 1629323200

Japan Japan Japan Japan redux.
It was always gonna be.
It's a kind of stupidity, maybe even (whisper it) slightly racist condescension to think that we can easily escape the trap they've been struggling with for 30 years.
Rates will not rise and bond purchases will only increase. Any attempt to do otherwise will be short-lived once the market starts to gag on the purgative of price discovery.

by J.C. | 19th Aug 21, 11:41am 1629330091

Japan's biggest issue with QE is that the banks are awash with funds at bargain basement cost of servicing but nobody wants it.

by JustAnOpinion | 19th Aug 21, 12:15pm 1629332136

And that is the key to this incredibly obvious situation, no connection between the money being created and those who drive the real economy. Frankly I am sick of hearing about QE in all its hideousness, this type of mutual masturbation in economic ivory towers should be kept out of the public eye.

by Audaxes | 19th Aug 21, 1:02pm 1629334935

Interest Rate Fallacy:
Low Yields = TIGHT money
Bank Reserves don't matter,
QE not money printing

by J.C. | 19th Aug 21, 1:08pm 1629335323

Not sure how to interpret that Audaxes, but I am 100% correct.

by Audaxes | 19th Aug 21, 2:17pm 1629339454

I am reinforcing your comment, but it must be noted:

The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.
Link page 2 of 14 PDF

This notice may have been updated without my knowledge.

by Jonny.Foe | 19th Aug 21, 3:05pm 1629342320

Not quite. The Japanese banks have much more cash in their central bank settlement accounts than they need to honour inter-bank payments (so do NZ banks). However, banks do *not* lend out this money and it makes no material difference to their decision to lend. The problem in Japan (and NZ) is not supply of credit, it is enough businesses wanting to access credit to do anything vaguely productive, on that we agree.

by J.C. | 19th Aug 21, 3:10pm 1629342628

You just confirmed what I said. But your point about doing anything "vaguely productive" is completely wrong. Much of Japanese bank lending goes into industrial production and innovation. That is a reason why they're a net creditor to the world. Japanese bank debt is not being used to speculate on house prices. There's a difference.

by Audaxes | 19th Aug 21, 3:27pm 1629343660

Japanese bank debt is not being used to speculate on house prices. There's a difference.
Unlike this lot: Ireland Home of the renters

by Jonny.Foe | 19th Aug 21, 10:16am 1629325015

I am amazed that these people are making important decisions. Let's take two of those statements:

'the associated balances in the settlement cash system will continue to provide stimulus'... this is literally nonsense. Banks do NOT lend out the money in the settlement cash system - and there is zero evidence that banks excess reserves is in any way stimulatory. All that the excess reserves do is remove the need for an overnight lending market between banks (and from RBNZ to banks when they are desperate). Worth watching a tutorial from Stephen Hail on this (he used to train bankers) https://www.youtube.com/watch?v=rREOylUf4Wo

'It said the OCR is a more “flexible” tool, which can be “adjusted more frequently and calibrated more precisely according to the level of monetary stimulus required”'... This is even worse. On what planet would anyone claim that fine-tuning the OCR has any impact on the real economy, employment etc? This blind faith in disproven monetarist theories (e.g. that businesses propensity to invest is higher when interest rates are low) is madness. The remarkable economic rebound we have seen in NZ has been the direct result of significant Govt fiscal stimulus - paying wages etc. The OCR has been borderline irrelevant - other than as a contributory factor to the housing boom.

by J.C. | 19th Aug 21, 11:44am 1629330241

I know you want to let loose your MMT descriptive prescription. Just do it.

by Jonny.Foe | 19th Aug 21, 12:04pm 1629331454

Ha! One thing that the MMT folk get right, and most economists and economic commentators get wrong, is how the banking system actually works. It is frustrating hearing supposedly well-informed journalists talking about how banks have got loads of money to lend out, or that QE is printing money to fuel the housing boom, or that Govt somehow needs to run scared of the bond vigilantes etc.

by J.C. | 19th Aug 21, 1:10pm 1629335448

One thing that the MMT folk get right, and most economists and economic commentators get wrong, is how the banking system actually works

Sorry my friend but this is so boring. You are correct, but if that is all the MMTers can bring to the table time and time again, what is the point?

by Jonny.Foe | 19th Aug 21, 4:10pm 1629346241

I can't speak for 'MMTers' - but I have read enough to know that the key MMT scholars (and Keynes!) have a lot more to contribute to 21st century economics than a 'descriptive model'. For example, the alternatives proposed to the neoclassical prescription of using a buffer stock of unemployed people (NAIRU) to combat inflation, and the recognition (as per Keynes) that inflation is actually rarely a 'monetary phenomenon' and would be better tackled through better fiscal planning (see US approach to financing the second world war). I worked my way through most of this reading... https://deficitowls.wixsite.com/mmt4mainstreamecons

by Hamish | 19th Aug 21, 10:25am 1629325523

Put all the comments so far together, and we get the following;
The banks are too big to fail.

by Rosenstein | 19th Aug 21, 10:38am 1629326290

Said another way: The freedom of free markets is too dangerous to reinstate

by J.C. | 19th Aug 21, 11:46am 1629330385

Said another way: The freedom of free markets is too dangerous to reinstate

Yes. That would involve creative destruction a la Schumpeter. Much easier to continue the monetary charade.

by Contrarian | 19th Aug 21, 11:05am 1629327945

That has been the case after the GFC of 2008. Will continue for another 50 years like that only. No alternative, unless Cryptos gain ground and replace paper currencies quickly. I am looking to China to lead the way on this. Bring on eYuan.

by Contrarian | 19th Aug 21, 11:03am 1629327822

OCR is a dud bullet in NZ as events have proved during the last 10 or so years. Time to ditch it, at least for controlling house prices. As for inflation, that tiger is sleeping soundly, with some signs of coming awake for a meal. It is not prowling and is not yet a threat. With Covid raging and economies down all over the world, Inflation is something that can be put on the back burner for another 3 years or so.
What is left for RBNZ ? Stimulating the economy when required and keeping the job rate at a happy level.
Central Banks have to reassess their role and re draw their job descriptions. Now is a good time to do it.
Instead of following the Fed blindly. Let us realise NZ is different and make policies to suit us.

by Carlos67 | 19th Aug 21, 12:20pm 1629332459

Nope the OCR is perfectly fine, its just the RBNZ are to chicken to pull the trigger. The choice was simple increase the OCR or watch the price of houses continue to run away. All the RBNZ are hoping for is that everyone finally runs out of money and house prices stop increasing, which logically simply has to happen at some point but they are dreaming at this stage, the market still has legs.

by JustAnOpinion | 19th Aug 21, 12:32pm 1629333125

Yes we have plenty of serviceability runway left at 1.99% interest rates on mortgages and that will keep driving prices. Of course the market will turn at some stage and I really feel for those FHBs who are left in negative equity, not for them the bach, the overseas travel, the new car. No, their reward will be depression, probable divorce and poor health outcomes on the back of that.

Economists see themselves as without blame, and amusingly as "scientists" but as social engineers they are almost as much to blame as their academic masters and the media.

by CWBW | 19th Aug 21, 11:16am 1629328591

If good ol' NZ turns into NSW like outbreak, I wonder if we'll get to see negative OCR in our lifetime.

by Hans Brink | 19th Aug 21, 11:44am 1629330264

Well I am no economist but reading how the USA is handling things it seems our reserve bank is doing a reasonably good job and I think they are ahead of the trend.

by CWBW | 19th Aug 21, 3:33pm 1629343986

That's true. Unfortunately RBNZ can't please everyone- a thankless job indeed.

by HouseMouse | 19th Aug 21, 11:47am 1629330460

We will see a negative OCR, but I suspect it won't derive from coronavirus- rather a financial crisis that is likely in the next couple of years.

by CWBW | 19th Aug 21, 3:34pm 1629344098

I'm eyeing on a 40 y.o. single malt that's coming up for auction in case we get to see it.

by flyer | 21st Aug 21, 12:01pm 1629504077

CWBW, let me join you too - I will bring one over.

At this rate I could afford one or two a day. Nom nom nom... bottoms up!

by Rob Reid | 19th Aug 21, 11:51am 1629330685

I'm still holding on to that hope, CWBW. Would really top off the madness.
Real rates are already negative anyway, so maybe not that big a shift except in the entertainment factor.

by CWBW | 19th Aug 21, 3:29pm 1629343788

You're right.

Nothing like being in person to witness a monumental historical moment.

Money can't buy that.

by Rob Reid | 19th Aug 21, 6:43pm 1629355426

Yup.
Closest I've been to history I think is being on the SS Canberra in June 1967 as it sailed toward the Suez canal. If it had been a couple of hours faster the 6 Day War would have exploded around us. Ship got a call from London, turned around and went down to the Cape instead. Just missed out.

by Independent_Observer | 19th Aug 21, 12:51pm 1629334301

Meaning 'I hope that we see a NSW like outbreak so that rates fall further so I can make even more money out of other peoples misery'

by CWBW | 19th Aug 21, 3:36pm 1629344165

Trying to put words in my mouth eh?

You seem to wake up on the wrong side of the bed everyday and your low opinion of others had served you poorly.

by company of heroes | 19th Aug 21, 3:16pm 1629342985

Trust me, you don't want to see it happen, your might make 50% profits on your houses, but your 50% profits will worth less than what you have now when it happens.

by CWBW | 19th Aug 21, 3:31pm 1629343908

Actually that depends on the velocity of the outbreak.

There's always an optimum to everything.

by Heaton1834 | 19th Aug 21, 3:14pm 1629342851

Won't the series of OCR increases adversely affect our exporters, again, by pushing up the NZD?

by company of heroes | 19th Aug 21, 3:18pm 1629343113

But at the same time, it will reduce the import goods cost down which is what we needed at the moment. That's why OCR can down and can go up too.

by PonziKiwi | 19th Aug 21, 3:32pm 1629343923

Right so pulling leavers on an interest rate machine determines the amount of credit creation. In theory yes but in reality that's not really true. More credit was created in 2007 with 8 percent rates than in 2018 with 2 percent.

by Jonny.Foe | 19th Aug 21, 7:10pm 1629357042

so true - the world is run by power hungry idiots who listen to brainwashed idiots with economics degrees

by flyer | 21st Aug 21, 11:59am 1629503995

Those idiots you refer to are certainly making investors rich. Nom nom nom...