RBNZ 'prepared to ensure well-functioning financial system including access to credit, cash & liquidity in the banking system.' BNZ's Toplis says Fed cut 'unjustified', RBNZ could be 'voice of reason in panic-driven world'

RBNZ 'prepared to ensure well-functioning financial system including access to credit, cash & liquidity in the banking system.' BNZ's Toplis says Fed cut 'unjustified', RBNZ could be 'voice of reason in panic-driven world'
Adrian Orr by Jacky Carpenter.

The Reserve Bank of New Zealand (RBNZ) appears to be hosing down speculation of an Official Cash Rate (OCR) cut coming before its next scheduled review on March 25.

This comes in a statement from the central bank on Wednesday, and is despite rate cuts from the Reserve Bank of Australia and US Federal Reserve this week in response to the mounting negative economic impact of the coronavirus crisis.

The statement says Governor Adrian Orr will make a short speech, to be released on March 10, on high level principles around how the RBNZ would assess and use unconventional monetary policy tools if it felt they were ever needed.

"The principles and speech will not discuss current economic conditions or the Reserve Bank’s outlook for the Official Cash Rate (OCR). The Reserve Bank’s next OCR decision is scheduled for March 25," the Reserve Bank said in bold in its statement, linking to the OCR page on its website.

"The Bank remains prepared in its business continuity role to ensure a well-functioning financial system, including ongoing consumer and business access to credit and cash, liquidity to the banking system and a stable payments and settlements system," the Reserve Bank says.

On Tuesday the Reserve Bank of Australia (RBA) cut its cash rate by 25 basis points to just 0.50% to "support the economy as it responds to the global coronavirus outbreak." And overnight the Federal Reserve cut its benchmark rate, the federal funds rate, by 50 basis points to between 1% and 1.25% in an emergency, out of cycle move.

The OCR currently sits at 1%, where it was left when most recently reviewed by the RBNZ on February 12.

New Zealand bank economists are aligning in predicting OCR cuts, with Kiwibank's economists on Wednesday joining the chorus, suggesting a 50 basis points cut this month, adding financial markets are now pricing in the move, and a 0.25% OCR end point.

However, Kiwibank's economists note monetary policy is a blunt tool.

"Cutting the cash rate is like a surgeon taking a broadsword, when a scalpel is required. [Government] fiscal policy is the most effective, targeted, response. The Government is targeting the industries most at risk, and will be judged on the size and effectiveness of the response. It’s essential to backstop business when faced with recession. And no Government will be criticised for supporting industries devastated by seizures in trade," Kiwibank's economists say.

The last time the RBNZ made an emergency out of cycle OCR cut was on September 19, 2001, when the OCR was reduced by 50 basis points to 5.25%.

The RBNZ detailing its thinking on unconventional monetary policy will fulfil a long standing commitment from the central bank. In 2018 the RBNZ detailed five options available to it should future economic conditions require the OCR be reduced to zero. They are moving the OCR into negative territory, buying domestic and foreign government bonds, purchasing interest rate swaps, and providing long-term lending facilities for banks.

US Fed's rate cut 'unjustified'

Meanwhile BNZ head of research Stephen Toplis has labelled the Fed's rate cut "unjustified."

"There are only two reasons why one should deliver an 'emergency' cut: when the financial system is in immediate threat and needs rescuing from failure; and when there is a one-off shock that requires a central bank to deliver some form of confidence boost. A pandemic is neither. At this stage there is no indication that the financial system is in imminent danger. And Covid-19 is not one off in nature nor can its impact on confidence be offset by lowering interest rates," Toplis said.

"The only other rationale for lowering rates is for cyclical reasons. What we are witnessing now is not a standard cyclical event. And, with the possible exception of instantaneous confidence impacts, monetary policy tends to operate with a 12 to 18 month lag. That will most likely be the very time that economies will be recovering from this shock anyway."

 "If anything the Fed’s response will simply add to the panic that is brewing around the world. Moreover, it brings the Fed that much closer to a state where it has no options long before the virus has taken hold in the US. The Bank of Japan and European Central Bank already find themselves in this position with the Bank of England not far behind," Toplis said.

 The role for central banks at a time like this is to respond if the banking sector freezes and, if it is to provide stimulus, do it when that stimulus has a chance of being effective such as when the peak in the virus’ impact is reached and the economy requires help to nudge it in the right direction, Toplis suggests.

 "Emergency intervention by central banks should have the same basic premise as currency intervention - only do it if there is a very real chance that it will succeed."

 "Much of the rational for the Fed’s move seems to have been to support the equity market and avoid the implicit tightening that a fall in equity prices is alleged to have. But the equity market has been exceptionally strong for a protracted period of time and had only corrected to the still elevated levels of a year earlier anyway. More importantly, future equity prices should be determined by an earnings outlook that is clearly deteriorating. No amount of rate cutting will change that earnings outlook in the current environment. The only thing that the rate cuts might achieve is to encourage people to take heightened risks investing in assets that are, arguably, already being unsustainably propped up by record low interest rates," Toplis said.

 In contrast to the Fed, Toplis said the RBA acted at its normal scheduled meeting time, cut rates by only 25 basis points, and offered further stimulus if needed but didn’t seem in any hurry to do so.

"Most importantly, there was probably adequate economic rationale for the RBA to cut anyway given inflation vulnerabilities to target and that Australia’s unemployment rate had ticked up to 5.3% and looked to persist in the wrong direction," he said.

The RBNZ's options

In terms of the RBNZ, Toplis said it has four options. They are:

·Cut rates immediately

·Wait until March 25 and cut 25 basis points

·Wait and cut 50 basis points

·Wait and do nothing.

"We think the RBNZ’s starting point needs to be considered here. The unemployment rate is at 4.0%. Even a relatively sharp shock to the economy could leave the rate within the 4.1% to 4.7% band that the RBNZ considers to be its possible NAIRU [non-accelerating inflation rate of unemployment] range. Inflation is near its target."

 "Additionally, the NZ dollar is already acting as an automatic stabiliser in these uncertain times. Were the RBNZ to take a different stance to the Fed and RBA, it could probably cope with a modest appreciation in the NZ dollar from current levels," said Toplis.

He added that RBNZ Deputy Governor, Christian Hawkesby, last week said cutting interest rates was the wrong response to coronavirus.

"It was for these reasons that we had the view the RBNZ would not cut rates at its next meeting. But clearly things have changed - at least in the world of global central banking. Given market pricing, and the frenzied activity elsewhere, it is going to be very difficult for the RBNZ to sit on its hands, so we are formally shifting to the view of the Bank cutting its cash rate to 0.75% on March 25 with the possibility of a further cut in May," Toplis said.

 "The other options should not, however, be ruled out in such emotionally heated times. We do, nonetheless, believe the rationale for a more aggressive stance than our assumption is not warranted. To start with, there is no need to panic and do something now. It won’t make a blind bit of difference if the RBNZ reacts in three weeks’ time rather than today. A knee-jerk reaction now risks generating more angst than it would fix."

Could the RBNZ be a 'voice of reason in an increasingly panic-driven world?'

 Given the RBNZ has expressed reluctance to cut rates then a 50 point move would be a major over-reaction, Toplis added, noting the RBA only cut 25 basis points with greater justification for going further. He went on to say the RBNZ could be the voice of reason in a panic-driven world.

"There is a very real opportunity here for the RBNZ to be the voice of reason in an increasingly panic-driven world. How the Bank behaves through this crisis will define it in history. We are only forecasting a rate cut because we feel the RBNZ will think it has no choice. Perhaps we are underestimating the combined gravitas of the new RBNZ committee and they might just surprise us all by buying the central bank here more time. Were they to do this, we would be the first to commend their actions despite it messing up our revised interest rate expectation," said Toplis.

"We want to be clear, here, that we are not underestimating the impact that Covid-19 will have on the economy. Very early on in the piece we stated that a technical recession was a distinct possibility. The probability of such is increasing by the day. But, more importantly, it is becoming even more apparent that the Gross Domestic Product growth path will not, as we had warned, follow a V-shape but rather a protracted and deep U. The RBNZ will know this too. Its Monetary Policy Statement forecasts were being put together when the Coronavirus impacts were very contained and its V-shaped forecast could never be anything more than a quick and nasty assumption."

"So, when the RBNZ does publish its next set of forecasts it is inevitable that its growth profile will be weaker and its unemployment profile higher. Both of which would argue for lower interest rates, in a standard modelling sense. But, how would lower interest rates help? In this environment: people won’t go out and spend more; and heightened business uncertainty will mean that investment activity will not respond positively either," Toplis said.

"This begs the question as to what central banks and governments should do in this sort of scenario. The truth is there is very little that they can do except be the proverbial ambulance at the bottom of the cliff."

"The RBNZ can provide liquidity if need be and closely work with the banking sector to ensure that systemic risks do not develop. One option in this environment might be to slow down the speed at which the banking sector needs to meet its new capital requirements. In particular, perhaps, delay the starting time for banks to move closer to standard models. This might reduce the possibility that the banking sector feels pressured to reduce lending," Toplis said.

What the Government should do

 In terms of the Government, Toplis suggested it needs to:

·Educate the public about the impending risks

·Focus aggressively on bolstering resources going to the health sector

·Provide short term assistance to businesses with cash flow difficulties by such means as ensuring government payments to suppliers are timely and offering selective tax holidays

·Ensure that folk who lose their jobs, or who can’t attend work for an extended period of time, have access to benefits they are entitled to in a timely fashion

·Ensure that the infrastructure of government is maintained.

"We are not epidemiologists or medical professionals so we can offer no insight as to the likely spread of Covid-19 in New Zealand. We can, however, say with certainty that its global impact will get much worse before it gets better and that there is a realistic chance of a significant domestic outbreak that will cause serious economic and social dislocation," said Toplis.

"That said, we cannot stress enough that whatever the impact it will pass. Covid-19 is unlikely to still be the world’s biggest fear in 2021. Consequently, it is imperative that everyone is prepared to deal with the stresses that this pestilence brings, accept what can be achieved but also be resigned to what can’t. All the while ensuring that knee-jerk actions will not prove detrimental when all of this is eventually behind us."

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Oh yeah, slim odds on that one Mr Orr. Second covid-19 case confirmed. The news not coming from our MOH or the Govt but from the WHO. Wtf?


F$%I our govt is useless.

Yes all pie in the sky dreams about building a better NZ. Actually getting stuff done ZERO.
Recent form shows it is much too big of an issue for them to make decisive calls and impliment.
All good here, we have 15 million face masks and we ordered another 5 million so no need to worry.. 5 million people, 4 each..... WOW.

Sadly, most are falling into the useless bracket. USA policy on not testing means their numbers are really low. They are only testing when someone is gravely ill. If you do manage to get a test and it’s negative then you are presented with a $3300 bill! South Korea have managed to organise drive through testing centres but nit seeing it anywhere else. Governments are taking the reactive approach rather than a proactive approach.

test kits out of China at $US3-00 ea. min order 1000 units, results in 10 minutes

With zero percent accuracy.

The second case went to Palmy. Bit ironic as I joked a week or so back that it might be the safest place.

I have to fly down for business in a couple of weeks and made the same joke, said will be near empty no tourists on that plane

News conference:

Where did she go in Palmy? It is a secret.

To visit Uncle TTP.
Wow 23 MPs in Iran are infected. Totally out of control there.

not surprising in a culture where bearded men frequently kiss each other as a greeting and pilgrims kiss and lick the gates of the shrines that they visit in holy places like Qom.

returned from Italy on 25th to auckland with the virus - then on 2nd March decided to go on a nice little return trip to Palmy! (8am till 2pm-ish) - should lay criminal charges to set an example

Seems very careless, coming from a known hot spot. You would expect her kids were infected on 25th. Big question is can they asymptomatic spread it at school within 7 days of exposure. We will know within a couple of weeks. Schools still open and rocking on. If it is spreading at the Westlakes then no chance of containment.
Edit: Partner who did not go to Italy, now showing symptoms. It's all on! I'm off to the supermarket to buy toilet paper.

Already stocked here. Yep it was always going to be all on. People just don't know what exponential growth is. This simply cannot be contained in a modern world of the aircraft and the motor vehicle. The perfect virus due to the long incubation period and asymptomatic nature. Couldn't have come up with something better in a Lab.

Ditto, I was getting laughed at by family and friends because I thought this was going to be bad and did some prep. Funny thing is people are still oblivious to the issue. Apparently suppliers have been warning about stock supply for at least 2 weeks. Amazing how much of the packaging comes from SE Asia. The other issue could well be contractors and casual staff being laid off. If this is the case people could be in real trouble.

don't forget the bottled water, as I understand the virus is taking out water mains all over the world

I think water would be fairly safe. They would do whatever necessary to keep water mains on.

Adrian Orr is a safe pair of hands.

NZ is lucky to have people of Orr's talent. He could be abroad (or in the NZ private sector) earning a much higher salary.


The will move before March 25 because

a)They will be forced to
b) Orr likes to surprise (the attention?)


At the moment wouldn't the bigger surprise be not moving before March 25?

3-month BKBM set at .765% today and the March future is trading at 0.71% out of next Wednesday, so the market is not pricing an early cut.

But I agree, it wouldn't be a huge surprise. It's just not a situation they have any control over though.

Mr Orr may indeed be an odd fish.

His last “surprise” cut of .50% wasn’t really necessary at all - and called out by many at the time as a mistake.

Now with all and sundry shouting “Armageddon” he’s in no particular hurry so if you don’t mind, he’ll get to it when he gets to it and no sooner.

I agree. He was so incredibly chillaxed at the OCR press conference prior to the 50bp surprise cut, it was very odd to my mind, dismissed Corona recently as well.

It's not that he likes the attention, its that nobody really does research into why the bank has to make the moves it does, so are always surprised by anything out of the box of what they believe to be conventional. Hence why the bank has to release forward-forward guidance like it is on March 10th to even get the topic of QE discussed.

Two years ago nobody was talking about QE until they had to bring it up.

Information was provided at the last MPS, the RBNZ is simply confirming a date. As Gareth suggests above, no out of meeting change to OCR, which most were expecting and positioning for.

Well aware. The information was available as far back as late last year. They were originally going to release the info in early 2020.

Still my point stands that nobody does any out of the box thinking around the RB, so its shock horror and they get the blame.

But the government 10 year note yield at near par with the OCR will certainly ignite belief that neutral rates are well below 1.0%.

With inflation still persistently below target and (as the Governor and Assistant Governor have recently highlighted) falling survey measures of inflation expectations, there isn’t a compelling case for the Bank to have lagged so far behind the market, allowing short-term rates to rise further relative to long-term rates. Link

Nonetheless, so called interest rate cut "stimulus" fails to spark the necessary growth of the productive side of the economy and gives banks cause to concentrate lending to fewer creditworthy borrowers that can offer up low RWA collateral. Hence enough is never enough and sovereign bond yields maintain their downward path.

The RB is still well above neutral, they have never been in a stimulative in the last 3 years, and the falling bond yields can be attributed to a lack of fiscal issue.

Which would you prefer?

There is no sign of the government paying down the ~$56.854 billion increase in outstanding government debt since the Dec 2008 quarter.

I don’t see why we are going off topic all of a sudden. I didn’t say they were paying it down

I said that falling bond yields were attributable to lack of fiscal issuance.

You also said this:
The RB is still well above neutral, they have never been in a stimulative in the last 3 years

What does this snipped graphic from the Nov '19 FSR show?

They clearly aren’t above neutral. Look how many RB bills they are having to sell each year to prop the interest rate up

What are you talking about?:
Predominantly, they (RBNZ) are selling RB bills to sterilise direct NZD injections sections 7&10 - FX swaps (lending NZD) into the forex forward market (borrowing foreign reserves) to bring the NZ interest rate leg down due to NZ bank arbitrage indifference apparently caused by balance sheet limits in NY.


Exactly and I learnt this from the back of a weetbix packet - right...?

Honestly that’s exactly what I thought.

What more can I say? Check it out with the RBNZ to confirm your worst fears. I did.

No, it didn’t, the opposite. You’ve described the mechanic of how an fx swap works which anyone with a remote interest can do.

What I’m asking you is, why are they having to do that in the first place? What is the total amount of outstanding RB bills symptomatic of?

There is a bit more to it than just trying to sterilise a leg, which they can do a number of ways

the RBNZ would assess and use unconventional monetary policy tools if it felt they were ever needed.

I suspect the tools will not be that 'unconventional' in terms of what's been implemented elsewhere, but we can only wait with bated breath. If you really want to see unconventional, look at Japan. The BoJ owns 20% of the Nikkei 225 through ETFs. If the RBNZ took a leaf from Kuroda's book, would the RBNZ start buying NZ equities? Contibute to mortgage payments?

It will be interesting to see how unconventional they decide tools need to be. I was disappointed by the Vanilla flavor to the previous releases. I'd like so see something that veers away from compression of term premiums and into areas like EOIR (nz version).

The latter yes but indirectly via negative real rates.

how is this for unconventional, create extra money build whole suburbs of houses all over the country

how is this for unconventional, create extra money build whole suburbs of houses all over the country

Not as ridiculous as it sounds (to me anyway). Japan poured money into infrastructure and the results have been phenomenal (if not somewhat excessive), including more public housing that they'll ever need. But directing money towards housing in NZ would be tantamount to treason to the boomer generation. We might have to settle for something different: sports stadiums, etc.

Indeed, at all costs money must be focused on embiggening boomer portfolios.

If the Reserve Bank cuts the OCR again I will withdraw my money from my bank term deposits as they reach maturity and buy another property if the housing market is still on an even keel.

As an aside, dumb investors wanting to blame someone else for their own stupidity:


The moral of the story is the timeless adage: 'Never put all your eggs in one basket.'

If the Reserve Bank cuts the OCR again I will withdraw my money from my bank term deposits as they reach maturity and buy another property if the housing market is still on an even keel

What do you think that will achieve?

If it’s a mortgage free purchase then it’s a hard asset. If buying with a mortgage then you have to be confident that you can pay they mortgage if we have a major economic downturn or that it can be successfully rented out. Plenty of rentals near us have been empty for a while. Seeing rents being reduced on some that are sitting around a while too. One example is a 4 bed weatherboard house with a pool in St Heliers reduced from $1600 per week to $1400 per week and now at $1250 per week.

This is the desired response.

If it’s not on an even keel, that would mean a better prospects for buying, as it declines. Strange logic to buy when rates are so low and central banks are obviously concerned about where the world economy is heading. We might get a situation of zero or lower rates, while the NZ housing market tanks 20% or more. That would be a good time to buy, if finances allow.

Sounds like a solid move to me, there should be enough knock on of bad economic data and overflow from Australia to knock the NZD down and keep us competitive, then he can keep the powder dry for when the shit really hits the fan.

We're so close to zero that the threat of having another 1% to cut is more effective than actually using it. Last thing we need right now is another pump of asset prices/housing, better to use the juice when everyone's scared enough to use it more wisely.

good comment

Sounds sensible tbh. Interest rates are already very low and house prices are still on the rise, which NZ doesn’t want or need. US Fed seems a bit in panic mode. What’s going to happen when stock markets enter a bear market?

Not as stupid as the Aussies eh ? if you cannot wait only 2 weeks to drop the rate then its a sign of pure PANIC and a sign its all going to turn to donkey do. Its all going to turn to donkey do anyway but thats at least a couple of months away. The OCR is already to low so we are screwed, what is Orr going to try and go negative so he can try and pull the banks into negative territory ?

I'd consider medicating this level of gloominess

Fascinating, the next 6 months of CPI data will tell us if RBNZ are in tune with New Zealands economy or not. What I'm hearing is that managers/companies are now delaying purchasing and hiring descisions. We know from experience that when consumer spending does slow it takes a long time for people to let the moths out of their wallets again so this is quite serious if the call is wrong.

Any one expects the OCR cut to make the virus go away ?

It's even stupider than that. Apparently the Fed expects a 50 bps rate cut to make up for 1-2 months worth of lost production in China. I'm sure it's gonna miraculously create millions of pallets of manufactured goods out of thin air.

the cut is irrelevant - and has virtually no value in the situation -

it wont bring goods in - wont get goods out -- wont get people working again - the loggers truckers dockers for example -- we will be spilling milk soon -- crops will start to rot -- no seasonal work -- businesses wont be able to get stock -- and cashflow will just cease - .5% cut in base rates mortgages etc will have no effect

liquidity will be needed -- payments to workers temporarily out of work - completely deferring mortgage or interest payments

many people have been talking about this for weeks - but he government only really said anythng yesterday -- forestry trucking and teh ports have been feelign teh impact for a couple of weeks at least -

this government is very slow to work out the consequences -- got stuck at close the chinese flights -- missed italy south korea japan and iran -- and failed to understand that the virus impact was way way bigger than if it arrives in NZ or not-

Way more people will die from the financial and material effects than from the actual virus - and the long term implications for NZ are huge if this does not die a natural death like MERS and SARS

Yield Curve Gets Ugly, 10-Year Treasury Yield Falls Below 1% for First Time Ever, 30-Year at Record Low, on Rising Inflation.

Gee , our financial institutions can't wait 21 days. No doubt busy giving customers lectures about long term planning at the same time .

An important point to note is that the RBA 0.25% rate cut yesterday was passed on IN FULL by the main banks almost immediately.

I'm sure the RBNZ will follow suit, hopefully there will be sufficient pressure on the banks here to pass on the full rate cut immediately as well. In that case we will be looking at a fixed mortgage rate of 3.15% or so which will be very welcome.

Won't achieve anything much, but it's very important we support the portfolios of asset owners!

No, it didn’t, the opposite. You’ve described the mechanic of how an fx swap works which anyone with a remote interest can do

What I’m asking you is, why are they having to do that in the first place? What is the total amount of outstanding RB bills symptomatic of?

There is a bit more to it than just trying to sterilise a leg, which they can do a number of ways

Orr & the team is much savvy than those OZ or Feds. Similar in critical healthcare actions often we need to put patient into hibernation state mode/comatose, leave it to the machines.. rather than keeping them awake to avoid them walking rapidly into the bright light. NZ current economics is already like that before Covid19, walking towards the bright light, the clever move is to shock & awe movement of OCR 75 basis point down. This will nicely put NZ economy for any worry.. nice hibernation, comatose state.. run by computers. Then reboot it again to a life...cross your finger. Covid19, loves cold temperature Mr. Orr & team - it's coming, so you need to prepare the earlier surprise!

The big risk is with supply chains, stimulating demand isn't the solution.