RBNZ Governor Adrian Orr puts onus on the Government to be at the frontline in the fight against coronavirus, saying monetary policy will play a "support role"

RBNZ Governor Adrian Orr puts onus on the Government to be at the frontline in the fight against coronavirus, saying monetary policy will play a "support role"
Adrian Orr

Reserve Bank (RBNZ) Governor Adrian Orr has tempered market expectations of the Official Cash Rate (OCR) being slashed by a large amount in the near-future.

He said, in a speech delivered in Wellington on Tuesday, that the RBNZ won’t have a “knee-jerk reaction” to coronavirus.

He also said monetary policy was in a “support role”, with fiscal policy (government spending) being at the “frontline”.

The main purpose of Orr’s speech was to detail progress on a long-standing piece of work the RBNZ has been doing on unconventional monetary policy - the tools it could use to ensure it meets its employment and inflation targets if the OCR nears zero. 

Orr noted other countries faced challenges implementing unconventional monetary policy in and after the 2008 Global Financial Crisis. 

“We’re not in one of those periods here in Aotearoa New Zealand,” he said.

“We have the time to think about how would we deploy, how would we communicate, if we ever needed to use these instruments.”

Markets have priced in a whopper 50-point OCR cut for March, although some bank economists forecast a more regular 25-point cut. ANZ economists are expecting a further 25-point cut in May, taking the OCR down to 0.25%, from where it's at now at 1%.

There had been speculation the RBNZ would follow the US’s Federal Reserve and make an emergency cut ahead of its scheduled review. Yet the RBNZ poured cold water on this in its invitation to the speech, specifically saying the next scheduled review is on March 25.

'NZ doesn’t need a knee-jerk reaction'

The small group of journalists and industry stakeholders at the RBNZ event watched closely for signs of what the bank's mood is and how it might respond to turmoil around coronavirus, and now an oil supply shock.

Orr spoke for more than 30 minutes, referring to handwritten notes. He didn't stick to the script of the more dense speech published on the RBNZ’s website. He then took questions.

Orr said coronavirus posed a fiscal and monetary policy challenge, “but monetary policy will remain in that support role with fiscal policy being very much the frontline activity as it is now”.

“We will be watching very carefully for what is the important monetary policy response we need to make, but we want to do that in the best and fullest information, not some knee-jerk reaction, because New Zealand doesn’t need a knee-jerk reaction.

“We’re in a good space. I’m not sure a knee-jerk reaction would be particularly useful.”

Orr noted that at the RBNZ’s last OCR review on February 12, the coronavirus situation was just evolving. It was clear there were specific industries affected, so a targeted fiscal response was required.

“That was then, this is now," he said.

“Our Monetary Policy Committee needs to go away and say, what is happening around the economic severity?...

“What do we know about anything new around the duration, location? And is it shifting from more narrow supply, fiscal policy-targeted responses through to a more aggregate demand response?”

Government officials are putting together a "business continuity package" for those affected by coronavirus.

While details will be unveiled next week, it's expected to include wage subsidies and working capital support for companies that face temporary credit constraints.

“Confidence and cashflow will win the day," Orr said.

Pressure on Finance Minister Grant Robertson 

Speaking in general terms, Orr echoed the sentiment expressed by a number of economic observers around the world - that monetary policy has done much of the heavy lifting, stimulating growth in recent years.

“Fiscal policy’s too often either ruled off the table because of a lack of credibility or high debt; or ruled off the table because there’s some sense it’s not as effective as monetary policy; or more importantly, you have to go through a long decision period and that might not be palatable in a global economy sense in normal times,” Orr said.

He credited the Government for committing an additional $12 billion to infrastructure investment, saying this has taken some of the heat off the RBNZ.

“Having one foot on the accelerator, the other foot on the brake only makes sense in very limited circumstances,” he said.

“Generally, if you’ve got incredibly low fiscal credibility - high debt - then often financial markets will say, ‘use the monetary, let’s just see this debt being reduced’. That’s not the situation here in New Zealand.”

Orr said monetary policy is “still there in a strong supportive manner”, but it’s important for it to “work in concert” with fiscal policy.

Cameron Bagrie's take

Economist, Cameron Bagrie, of Bagrie Economics said his take-outs from the speech were that Orr was hosing down expectations of an early OCR cut and putting the ball in Robertson’s court.

Bagrie expected a 25-point cut on March 25, noting the RBNZ will be careful about how many bullets it fires, with the OCR already at a record low. He also noted the usefulness of using monetary policy to combat a supply shock.

He said Robertson was taking steps in the right direction, but has more steps to take.

The quicker you go, the higher the risk of hitting the wrong target, Bargie said. On the flipside, you don’t want to risk being slow out of the box.

He said the Government would need to put some guarantees in place so that banks can support customers, by waiving their normal credit criteria for example.

Given the importance of putting the right boundaries in place, he maintained this kind of assistance couldn’t be set-up overnight.

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35 Comments

Personally I have confidence in Orr’s ability; however, OCR currently at 1% means not too much powder left to use so will need to use it wisely. My pick for March 25 depends a lot on future extent of virus incidence in NZ and the external impacts on our economy.

RBNZ Governor Adrian Orr puts onus on the Government to be at the frontline in the fight against coronavirus, saying monetary policy will play a "support role"

I guess the RBNZ will as a supportive as the City of London is to the UK.

However, such banks are not interested in putting their money into industry and manufacturing, they put their money into real estate speculation, financial speculation and foreign currency trade. And thus the financialization of British and American economies resulted, and the real jobs coming from the real economy decreased or disappeared.

Although many economists try to claim differently, the desperation has boiled over and movements like the yellow vests are reflections of the true consequences of these economic policies.

We have reached a point now where every western first world country is struggling with a much higher unemployment rate and a lower standard of living than 40 years ago. Along with increased poverty has followed increased drug use, increased suicide and increased crime. Link

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everyone in NZ just needs to stay at home for two weeks, ok so we get a population explosion in 9 months and probably a spike in divorces, who cares at least we are alive.

Many future consumers..Good for the economy or atleast the business people.

"We have reached a point now where every western first world country is struggling with a much higher unemployment rate and a lower standard of living than 40 years ago. Along with increased poverty has followed increased drug use, increased suicide and increased crime." Oh look - the 'free market' economy in action! I really struggle to understand why there are still believers in it!

Virtually all the benefits of the last 40 years of growth have gone to the top 1%. Te wa e ara ai ka hongi te kowhai (Time to wake up and smell the kowhai. )

Audaxes, there is another comment in the article that leapt out at me; "It is no secret that much of the "finance" that goes through the City of London and Wall Street is dirty and yet despite this recognition, there appears to be an inability to address it and that at this point we are told that if we tried to address it by breaking up and regulating the "Too Big to Fail" banks, then the whole economy would come tumbling down.
That is, the world is so evidently run by criminal activity that at this point we have become dependent on its dirty money to keep afloat the world economy."

So politicians who persist in retaining the 'free market' economy and refusing to regulate the big banks and corporations are effectively aiding and abetting crimes!

No pressure, Mate.

"banks can support customers, by waiving their normal credit criteria"
Perfect! Just what we need heading into a credit crunch - rope in the marginal borrowers.

bw one of the great institutions of capitalist society is governments guaranteeing bad bank loans. It is most important the finance sector knows that no matter how poorly it conducts its lending and credit analysis there is always the taxpayer willing to be passed the buck to clean up.

And that's the reality that didnt really happen in 2008. Any party that votes to let the banks burn for their lazy ponzi fueling operating practices gets my vote. Great timing in NZ.

Time for the the stupidly leveraged to feel the other side of the fire of leverage. Burn baby burn.

The alternative would be to stop evergreening loans to zombie corporations and push banks to progressively write off that debt. Unfortunately, despite declining rates, the proportion of lending to zombie corporations appears to be rising. My guess is this will eventually manifest itself as an NPL crisis if we get a sudden recession.

This includes Property Investors on interest only mortgages.

Italy has suspended mortgage payments as country is in lockdown. The EU will have having palpitations.

They'll change their tune if low CPI figures get reported for the first half of this year or the virus starts to take a hold. It seems to be the misfortune of our Reserve Bank governors to forget that reality does not care a lot for their views.

Time to include hand sanitizer in the basket of goods

5 year to 15 year break even inflation rate is at 0.8%. The market is telling you long term expectations are outside the 1-3% band.

Here we have the RBNZ again claiming to know more than the global banking community..... first on the capital proposals where the RBNZ have gone in completely the opposite direction to global bank regulators whilst both increasing capital requirements.. and now the RBNZ refusing to cut.. saying to cut would be a knee jerk reaction.... well... the Fed and the RBA have cut... guess we are smarter than them.

What have the Fed and RBA cuts achieved? And in your view what would cutting the OCR from 1% achieve at the moment?

or... the counter-factual... what would have happened if they did nothing? The fact the Fed and RBA have shown a willingness to respond has allayed bank funding concerns and ensured the market is aware they are willing to act.

I fear the stance from the RBNZ is more strategic... putting the onus on Robertson to act (which I dont disagree with).. but given the anxiety in markets there is a need for the central bank to shows it is cognisant of pressures and doesnt have its head planted in the sand.

My sentiments exactly

I support the RBNZ requiring Banks to hold more capital to reduce the risk of a bailout or worse a bail in. Adrian Orr has an awesome reputation and I hope the Govt takes notice of his advice for a change.

Noone is arguing about the need for more banks to hold capital... every regulator in the world requires this and banks have accepted this.

The issue I have is how the RBNZ have arrived at the number... seemingly out of thin air and completely opposite to how foreign regulators have gone.

Overseas the onus will be on banks to have better models and be subject to stringent tests in terms of the accuracy. The RBNZ have concluded that it all sounds too hard so have simply concluded that banks should roughly double the amount of capital they hold.

Effective oversight or a dereliction of duty?

by Cowpat | 6th Mar 20, 4:26pm
If Wall St falls tonight , RBNZ will get the nod and cut OCR Monday morning

10
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This is getting boring.
Grow up.

Preparing base for 0.25% cut when they meet in March instead of 0.5% unles market fall more from here.

Question to be asked : Will we have recession or depression.

Good Read :

https://www.smh.com.au/business/markets/the-moment-central-banks-were-tr...

Yes, Orr & the team which surely all property owners are not a fool, they knew how rock solid NZ banking systems, the resilient property bull. So this little world economic distortion is already been expected/predicted, hence anticipated - So, April those minimum deposit guarantee, agreeing to put bank CAR into 7yrs, already reduced the OCR to 1% & send a clear signals to NZ Public, we are in sounds economic territory, so go out and spend, spend, spend - if likely this minor economic dent from Covid19 & ripple effects of Saudi Vs Russia oil dump prices start to show is for betterment in NZ (cheaper fuel to pump up the property economy production again) - The real estate productions, can only be ramp up further, no two ways about it.. so watch this space... the 'shock & awe' to trigger the RE production spending industries.. 25th March, 75 basis point down! - then further 25 basis down in May - World watch & learn NZ will lead the way, with it's Chinese backbone.

Everything will be fine by next Monday, also the Auckland Warriors will win the NRL in 2020. Heres to a brighter future everyone!

Stay positive everybody ... thinking positive not testing positive. Keep the faith

With covid19 all the top sports teams will become virtual - that'l mean anyone could become an all Black. They just gotta be a good gamer! Opportunity knocks!

This year, is our year!

So if his house catches fire he'll also sit on his hands and smugly state hes not panicking or making any knee jerk reactions ??!!

Hes only got 1 small fire extinguisher so hes 'got to ration it and use it wisely' so he'll wait till the fire gets really big first ??!!

Sorry but the Fed have more brain power and didn't knee jerk react, they simply did the right obvious thing promptly when the small fire extinguisher may still have some effect.

More delays = fire gets so big orrs little extinguisher will be irrelevant

Eh, arguably the Fed has been doing the wrong thing for years now. Is it even possible for them to simply money scramble the economy away from economic cycles? It doesn't look like it.

Yeah you see them abused all day every day no matter what.

The key thing to remember is that we will never know what things might have been like had they not 'kicked the can down the road' as all the critics like to say.

Some hardship is inevitable. Minimizing it across most people is the way forward. Yes that meant some bail outs during GFC (of the terrible 'bankers!') - just like we'll see our tax dollars going directly into pockets of some less than reputable business people running dodgy motels, tourist focussed enterprises this time around. The money needs to go where it goes to minimise the damage, simple as that.

Governments targeted response will be too late and miss too many businesses that don't fit their academic understanding of who is being hurt by this - Are gyms going to be included for example ? How about the cafe that serves the gyms? The shoe retailer next door that has seen a big reduction in foot traffic ? Where does it end ? OCR cuts ASAP are needed as a first broad-based measure.

Once a business closes shop and lays off all employees a later OCR move won't bring that business (and its employees) back; But it may (as in probability greater than zero) help keep some right on the margins to keep going and weather the storm.

Minimizing it across most people is the way forward.

Agree, that would be ideal. Whether this is what has been done seems to be more up for debate.

Very sensible!