By Alex Tarrant
The Reserve Bank should buy the government's earthquake recovery bonds, as well as overseas assets to replenish the Earthquake Commission's disaster fund, with newly created money, the Green Party says.
The move would reduce the need for the government to borrow from foreign lenders, therefore taking pressure off the New Zealand dollar, co-leader Russel Norman claimed on Sunday.
Norman suggested initially buying NZ$2 billion worth of bonds, then assessing the effects that had on the exchange rate and the economy before continuing or stopping purchases.
See below: Reaction from Prime Minister John Key; Reaction from NZIER economist Shamubeel Eaqub; What the Reserve Bank has previously said about quantitative easing.
Asked how much bond and asset buying with newly created money - dubbed quantitative easing (QE) - could eventually be targeted, Norman suggested New Zealand's trading partners had enacted QE policies of between 10% and 24% of GDP.
The government has earmarked NZ$5.5 billion for an earthquake recovery fund, while Norman suggested replenishing the Earthquake Commission's disaster fund to NZ$6 billion. Together, that NZ$11.5 billion would represent 5.6% of New Zealand's NZ$205 billion economy.
Meanwhile, the Green Party also wants the Reserve Bank to be given a broader mandate for the operation of monetary policy, other than just its primary mandate of price stability. Norman claimed giving the Bank other focuses such as "exporters and jobs," would lead to the Official Cash Rate being lower than it currently was.
The Green Party said use by the Reserve Bank of 'macro-prudential' policy tools - which it already has the ability to use - such as tightening loan-to-value ratios to limit mortgage lending, at the same time as lowering the OCR, would work in tandem with its capital gains tax policy to stem a possible revival in the housing market due to lower interest rates.
The Greens' policy follows comments from Labour Party finance spokesman David Parker that the Reserve Bank should be allowed to "give a wee bit" with respect to its inflation target so that it could consider equal mandates to price stability like the state of the tradable sector, employment, and economic growth. [See below for comments from RBNZ head of economics John McDermott that having higher inflation along with a lower currency might not alter New Zealand's real exchange rate.]
Print baby, print
Norman said the party's policy on quantitative easing - where a central bank creates new money to buy bonds or other financial assets - would help take pressure off the New Zealand dollar.
"We propose the Reserve Bank purchase, in a staged way, earthquake recovery bonds to fund the rebuild of Christchurch and overseas assets to rebuild the Natural Disaster Fund more quickly. Both measures will have an immediate downward impact on our exchange rate," Norman said.
“Buying Christchurch earthquake recovery bonds will reduce the need for the Government to borrow offshore. Currently, about 60 percent of all Government borrowing is from offshore," he said.
“Buying overseas assets to restore the EQC’s Natural Disaster Fund will prepare us better for any future natural disasters. The National Government raised the EQC levy in February raising yearly revenues from NZ$86 million to NZ$260 million. Treasury advises that the new levy rate will rebuild the Fund to its pre-earthquake level of NZ$6 billion in about 30 years.
“We need to speed up the rebuilding of the Natural Disaster Fund to get New Zealand’s safety net back in place. The Fund’s holding offshore assets will limit the risks to domestic price stability while placing downward pressure on the New Zealand dollar,” Norman said.
'Won't be inflationary'
Speaking on TVOne's Q&A programme on Sunday, Norman said the expansion of the money supply would not be inflationary.
"So if you look at the earthquake bonds, the earthquake building is happening already, so we’re not increasing construction activity. We’re actually just making sure that we’ve got the money to do it," he said.
"And the Natural Disaster Fund, which is currently empty, we would be restocking the fund with foreign-denominated assets, which is— and it’s important to understand this – the Natural Disaster Fund is stocked with foreign-denominated assets, because in the event of a big disaster in New Zealand, you want access to those overseas assets.
"So once you start purchasing overseas assets with New Zealand dollars, you don’t add to inflationary effects inside the New Zealand economy," Norman said.
Prime Minister John Key said on Monday morning that the government's view was the Reserve Bank should have price stability as its primary target. He said the Green Party's quantitative easing plan was "whacky" and would lead to higher rates of inflation.
“The [Reserve Bank's] primary focus is inflation, and you can’t ask an organisation to have lots of different primary focuses, or it doesn’t make sense," Key said on TVOne's Breakfast programme.
“But you’ve got to remember, the Reserve Bank Act and the policy targets agreement is broader than that. It does say that they’ve got to look at output and they’ve got to look at all sorts of other factors," Key said.
The Reserve Bank’s mandate had been reviewed on numerous occasions.
“Last time, under the previous Labour government, in 2008 they found that we had world class policy. And most countries follow what we do," Key said.
“So this latest idea of the Greens to print money, that’s a pretty whacky idea. Why do we think that? Firstly, if printing money made you rich, Zimbabwe would be the richest country on the planet, and it’s not," he said.
“Secondly, what it does is it increases money supply. That increases inflation. That means your interest rates would go up – so your mortgage costs would go up and your business costs would go up – it means the cost of everything you buy would go up. It means your price of petrol and the likes would go up.
“So yes, it might bring your currency down, it might be a by-product of that, but at quite a cost to the rest of [consumers]," Key said.
"Countries that have really got themselves in problems with inflation, like Germany and Argentina, they will probably attest that [it’s been] not that great an idea.
"Also, our economy’s not in bad shape. The Greens are saying, ‘let’s deploy something that might work in a place like Spain, where there are terrible problems.’ But we grew at one of the fastest rates in the OECD, we created 57,000 jobs in the last couple of years. We don’t have a crisis. They could create a crisis for us, but we don’t currently have one,” he said.
'Everyone else is doing it'
Norman said New Zealand needed to copy major global central banks such as the US Federal Reserve, Bank of England, Bank of Japan, and the European Central Bank, which were all engaging in quantitative easing after lowering their benchmark interest rates to near zero.
“Since the Global Financial Crisis, our major trading partners have engaged in large scale measures that have devalued their currencies. Our productive sector has been the first casualty and, along with it, any chance of securing our long-term prosperity," Norman said.
“The UK, USA, Japan, and the European Union have deserted traditional monetary policy tools in favour of successive rounds of quantitative easing. New Zealand can no longer afford to be a pacifist in a currency war,” he said.
"Bernard Doyle, a strategist at JBWere, recently said that the Reserve Bank should intervene to drop the value of the kiwi dollar. New Zealand’s Reserve Bank is one of the few central banks running relatively orthodox monetary policy – “a rarity in the global economy with positive interest rates and no policy on quantitative easing”. In a world where the major central banks are breaking all the rules, Doyle argues that our position is no longer serving us well."
'Not even sure if it works'
New Zealand Institute of Economic Research economist Shamubeel Eaqub said those central banks had embarked on quantitative easing programmes as a "last resort," having exhausted all other options after cutting their benchmark rates to near zero.
“And the fact of the matter is, we’re not even sure if [the policies will] work," Eaqub said.
“Isn’t that what you get told at the school yard? Just because everybody else is doing it, it’s not a good idea," he said.
“They’re doing it because they’re desperate. They have no other measures. New Zealand is not in the same case. We can cut interest rates if we need to. We can increase government borrowing and government spending if we need to. We’re in a very, very different situation. This is not the time to weaken our economy and our policy settings," he said.
With regard to the Reserve Bank's mandate, Eaqub said there needed to be a decision made on what the Reserve Bank's primary target should be. The Bank shouldn't be asked to have multiple targets on the same level as each other.
“Either we deal with inflation, or we deal with exchange rate. You can’t have both. But at the same time, what we need to do, is we need to make sure we have real policies on things like superannuation – ageing of the New Zealand population; we need to have access to international markets though free-trade agreements; we need to deepen our capital ties," Eaqub said.
“Those are the kind of fundamental things that the government can influence through policy. The exchange rate is not one of them," he said.
The Reserve Bank had already been looking at using macro-prudential tools as further instruments to try and stop future asset bubbles.
“So it’s already happening in the background, and it’s actually a good thing. The Reserve Bank has a fairly wide mandate to make sure there is stability in the economy," Eaqub said.
"But you have to look at one measure to control. When you’ve got a very blunt tool, you’ve got to make sure you’re fairly focused on one particular thing," he said.
What the Reserve Bank says:
Former Reserve Bank Governor Alan Bollard, whose ten year stint at the Bank ended in September, said last month that quantitative easing policies from major central banks could turn into a form of 'monetary protectionism' if they set in over the long-run.
If so, that would create significant implications for exchange rates, capital flows and competitiveness in the world economy, Bollard said in the Reserve Bank's September bulletin. It would be disappointing if this were the case, although it was still too early to tell if competitive QE would be a long-run affair, he said.
In March, Bollard and RBNZ head of economics John McDermott tackled questions from opposition members of Parliament's Finance and Expenditure Select Committee on quantitative easing.
On what impact such a policy might have on the New Zealand dollar, Bollard said a lot would depend on what the market thought the central bank was trying to do with the QE, how credible they thought that was going to be, but also on what other pressures they saw in the New Zealand economy.
“The sorts of growth rates we’re talking about [in New Zealand], while not huge, are actually reasonably strong by OECD standards now,” Bollard said in March.
“So, if being completely hypothetical, we were to try and put in place some form of quantitative easing at the minute, first of all they’d scratch their heads because they wouldn’t understand what we were trying to do," he said.
"Secondly they’d say that this country is growing and is near full capacity – that’s got to mean inflationary pressures. Therefore the OCR is going to at some stage have to go up faster than it otherwise would.
"Therefore the NZ dollar might look attractive to buy in," Bollard said.
"I don’t know, is the answer. But I wouldn’t just assume it would depress the value of the New Zealand dollar."
Meanwhile, McDermott said quantitative easing could lead to inflation, which would mean the real exchange rate may stay the same even if the nominal exchange rate did fall.
“If we were to have expansionary monetary policy – either low interest rates or quantitative easing – more than would be the case for our inflation target, you could imagine a case where the New Zealand dollar would depreciate – that would be fine – unfortunately we’d have more inflation, and the real exchange rate wouldn’t really change," McDermott said.
"New Zealand’s competitive position won’t actually have improved. Our tradable sector won’t have gained any advantage from that particular policy move,” he said.