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Wigram Capital Advisors' Rodney Jones on cutting the OCR below 25 basis points, the economic gains from eliminating COVID-19, and winning ugly against the virus like the 2011 All Blacks

Wigram Capital Advisors' Rodney Jones on cutting the OCR below 25 basis points, the economic gains from eliminating COVID-19, and winning ugly against the virus like the 2011 All Blacks

By Gareth Vaughan

The Reserve Bank of New Zealand (RBNZ) could cut the Official Cash Rate (OCR) to somewhere below 25 basis points but above zero while it waits for banks to be ready for negative interest rates, suggests Wigram Capital Advisors principal Rodney Jones.

Jones also told he'd like to see more debate about the RBNZ response to the COVID-19 crisis, including around its large scale asset purchase program, or quantitative easing (QE). Jones said he personally prefers the Reserve Bank of Australia's response. And, having closely followed events in Japan for more than 20 years, Jones said the RBNZ could take a leaf out of the Bank of Japan's book.

"On March 16 the Reserve Bank made a commitment to keep rates unchanged [through] forward guidance. But that's not supposed to be a binding constraint. They can change that, the facts have changed. What did Keynes say? The facts change you change your mind, we expect that with central banks. We expect central banks to deal with what's in front of them. And the question to ask is why are New Zealand rates not at zero today? Why are they still at 30 basis points? The bank bill rate is up at 30 basis points, what drives lending rates?"

"Now we're talking about maybe negative rates will be on the agenda in 2021, and yet it's not clear why rates aren't zero today. So I think there are different things the Reserve Bank could be doing they're choosing not to do, and it's not clear to me why they're not doing that," Jones said.

"When I covered the Bank of Japan they cut from 25 [basis points], to 15 to 10 to five. And then eventually they went to zero, they actually went to one or two basis points. So there's nothing magical about 25 basis points. We could have had the remuneration rate set at zero, and the RBNZ lending rate set at 10 basis points, or five basis points, [there's] nothing to stop that."

The Reserve Bank of Australia has its cash rate at 0.25%. It's also buying government bonds in the secondary market in support of a target of 0.25% for the yield on three-year Australian Government bonds, and an interest rate of 10 basis points on exchange settlement balances held by financial institutions at the central bank.

The RBNZ's QE program, when announced in March, was to be worth up to $30 billion over 12 months. It has now increased to up to $100 billion by June 2022, with the RBNZ buying central and local government bonds on the secondary market. The aim is to ensure low retail interest rates in order to help meet its inflation and employment targets.

'We should be debating different policies'

Jones said he's not convinced a very large QE policy will be resilient once the COVID-19 pandemic passes, because the RBNZ may have to start selling the bonds it has bought at higher interest rates.

"Now sure you take a loss but in a sense the government is having to finance at a higher interest rate, whereas we could all be issuing 10, 20, 30 year bonds and funding at this very low rate. And so I think there needs to be more debate about QE, particularly with these very big numbers now," said Jones.

"As an emergency measure for this year it made complete sense, 10% of GDP, $30 billion, yeah we understand that. The Reserve Bank of Australia has done something similar. But what the Reserve Bank in Australia has done is rather than buying long term bonds, they've focused their buying in the three year and they've said 'we want yield curve control, we want to keep the three year rate at 25 basis points.' And because that is credible they haven't had to buy so many bonds." 

"So I think we should be debating different policies. And I'm not convinced having the Reserve Bank buying $100 billion of bonds is the right policy from a medium-term basis, that it's resilient and I don't think we've had enough debate and discussion around this," Jones added. 

"In New Zealand our Official Cash Rate's 25 basis points, but you [also] have something called the remuneration rate which is the rate that the central bank pays banks. Now in Australia that is 10 basis points. So while their cash rate is 25, it's 10 basis points [on exchange settlement balances] in Australia. They have lower rates than we do."

Meanwhile, Jones said that whilst a deflationary environment is the most likely one over the next couple of years, he's not ruling out a return to an inflationary environment.

"I just have in the back of my mind that in a world of deglobalisation, trade frictions, of the need to price carbon effectively, of supply chains being disrupted by geo-politics, we have China official papers threatening to invade Taiwan which is a critical part of the western supply chain, the world we're going into is much less certain than the world we've lived in for the last 30 years. And I can see paths where inflation is an outcome."

"I'm not predicting it, but I think the future is very two sided. Deflation is not guaranteed. People assume with [an] ageing population deflation is a given and I don't think we can be so sure. I think we have to be open minded [about] a return to inflation even if you don't necessarily forecast that. It's the sort of thing that may not be around one corner but could be around two," said Jones.

'I think a lot of the debate in New Zealand, and talk about Sweden, has missed the gains from [COVID-19] elimination'

Wigram Capital Advisors has been modelling the spread of COVID-19 since it emerged in Wuhan, with its modelling used by the New Zealand government earlier in the year. Jones said the firm's COVID modelling came about because he experienced SARS in Hong Kong in 2003 and kept a lot of data.

"I found an old spread sheet from 2003 that I hadn't opened in 17 years that had all the data in. So we got to work modelling SARS to start with, looking back at the Hong Kong experience of 2003, and then that allowed us to be analysing the Wuhan data. And then we were broadening it out across cities in China until they stopped publishing data around mid-February," Jones said.

"So once it started to spread we were able to take that modelling approach and apply it to Europe, the United States and then to New Zealand when it arrived here. It's not an epidemiological model, but it's based on models that were constructed after SARS by epidemiologists."

Jones said Wigram Capital Advisors is still modelling COVID-19 daily, out a little beyond 14 days into the future. This he describes as "a guide on the path of the virus."

With the recent re-emergence of COVID-19 in the Auckland community Jones said there has been lots of criticism, or "carping." In response he uses a rugby analogy pointing out after the 2011 Rugby World Cup New Zealanders didn't complain that the All Blacks had only won the final by the skin of their teeth.

"This is really about getting the job done. And in rugby terms sometimes you have to win ugly, it's not about perfect," said Jones.

"And I think there's a lot of demands for perfect in New Zealand. In reality no one has achieved perfection with this virus. It's very tricky, it's very dynamic, it moves in ways we don't understand, still."

"What we did right was once we realised we had community transmission...we went into regional lockdown straight away. That's the ideal policy. We've achieved elimination, we had 100 days free of COVID, then we had an outbreak...That regional lockdown was able to stop the virus spreading, we didn't have to apply lockdowns beyond Auckland," he said.

"Hopefully it's not long until we can get back to elimination. What we saw under level 1 is there's a big pay-off to elimination and that's what we see every day with the Chinese data, Taiwan data...You get back to elimination your economy normalises very fast. I think a lot of the debate in New Zealand, and talk about Sweden, has missed the gains from elimination, or the payoff from elimination."

And Jones believes New Zealand can get back to where we were just a couple of weeks ago.

"And with the improvements at the border we should be confident that we can do that. We hopefully will come out of this saying 'we know what to do, this is not about perfect, mistakes will be made, it's a very complex process.' But if we get an outbreak we don't need to panic. We have tools to contain it. We can do mass testing, we can contact trace, we can lockdown a region, and then we get back," said Jones.

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Oh dear. The blame it all on border staff and DOH and gov (take your pick n mix) won’t like this. Never mind that testing border staff for the carping brigade produced one case and no connect to outbreak

Ah yes, because we got lucky (again), it means there wasn't actually a problem at all and we should have looked the other way while what we were told was happening and what was happening were miles apart. Flawless logic that is definitely a viable long-term strategy.

A negative Swab test, doesn't mean they don't have covid.

What it means, is they do not have detectable amounts of the Covid virus in the upper respiratory system at the time of the test.

It is a vital difference, that many people seem to be missing.

1. I'm fed up with all these "debates" they just become excuses for the intelligentsia to wheel out their keyboards and write long unintelligible tomes that the man-in-the-street cannot understand

2. Being a novice on monetary policy I have yet to see one sensible article about the logistics of how negative interest rates will work and how the retails banks will respond.

3. My simplistic bench-test on negative-interest rates comes to a stand-still at the point retail banks will "have" to increase retail interest rates in response to it or just suck up decreased margins Tell me I'm wrong

you are wrong, the RBNZ can supply money to banks at a negative cost to maintain bank margins.

If the taxpayers are paying the bank to operate, perhaps there's little point not owning 51% of it?

Internationally, banks have all struggled to operate effectively with negative interest rates. The reason you cant get a simple answer from economists is because this is a massive theoretical leap with little to no empirical evidence to support it.

I remember reading an article few years ago that in Sweden, where they had negative interest rates at the time, people started to overpay their taxes. why? the laws to charge interest on overpaid taxes was not updated and it was paying a small, but positive, interest. Just an example :).

I don't think you'll see negative interest rates on the reserve currency, that would be the end game. Others don't matter so much.

"People assume with an ageing population deflation is a given and I don't think we can be so sure."

So what the flip side?
Oldies (and there's millions more each day across the Developed World), who have had their disposable income squeezed over the last decade, and diminished to $0 will get out there and spend, spend , spend!? I find that highly unlikely on the basis that to do that, they are going to have to .....borrow to spend. And which bank is going to lend an +65-year-old with no job except being paid to be old, the money to do that with? The Old will save and not spend. Or, Sell ( anything and everything ie: Deflation) and Spend!
Of course, an aging society is Deflationary! It always has been and always will be, and it was obvious that 'was a given' from 2011 on ( when the earliest Baby Bommer, in general, would retire at 65)

So, you’re convinced that low rates are powerful stimulus. You believe, like any good standing Economist, that reduced interest costs can only lead to more credit across-the-board. That with more credit will emerge more economic activity and, better, activity of the inflationary variety. A recovery, in other words.

Ceteris paribus.

What happens, however, if you also believe you’ve been responsible for bringing rates down all across the curve…and then no recovery. Just as the textbook said, lower yields as far as the eye can see. And yet, zip.

Any normal, rational person requiring nothing more than common sense would see this situation and realize the faulty premise; and the stark implications therefore needed to rectify the matter (that Economics might need to just start over). Maybe low rates aren’t always stimulus? Link

You Need NIRP But Because NIRP You Then Need To Lessen NIRP; Or, Just Trust US, This Stuff Just Works

The Japanese central bank has always been at the forefront of, well, you can call it entertainment but it’s not really entertaining. It’s tragic

The whole monetary policy system needs to be reevaluated. Interest rates have been trending down for decades. Pushing into negative territory will come with problems, the first of which being physical cash is still legal tender.

Id suggest the clock is ticking for cash

Well, they have smashed the 2 to 5 year yields (2023 to 2025) in the last week. We are going negative. April 2023 currently yields 0.05%. The rest of the curve is down recently as well.

I would think the new RBNZ charter locks this path in, regardless of whether is sensible or not. The minimizing "cyclical variations in employment" section probably prevents anything but perpetual rate cuts until inflation turns up.

So am I going to have to be the annoying poindexter to point out that the all blacks won 8 -7 in the 2011 RWC final, not 9 - 7.

This is of course crucially important to the discussion on CO19 and RBNZ quantitative easing. I'm sure you would all agree.

I chose to let that one go Jamin, as 8-7 or 9-7 doesn't change the point he was making. But yes, it was 8-7.

My take on these two? They are locked and cocked into the 'free market, globalisation' paradigm with little ability for real in-depth critical thought and analysis. they seem to have no understanding that our Government is a currency issuer, and therefore believe that the Government has to borrow to spend. to be fair though they are not alone. For those in this forum here is a question that may help explain the difference.

In 1971 there was only a limited amount of currency loose in our economy, since then on-going inflation has seen fit to essentially suck most of that up, one way or another (cynically - private banks have driven a fair portion of it off shore as profits), so where has all the extra money come from to keep the economy going?

Murray86, you really have become fixated on MMT. And MMT is right in as much that in a closed economic system (i.e. to external trade and no exchange with anybody using other currencies), the sovereign can print as much money as they want. There is not need for them to borrow from the public or anything. But, the public must still hold faith in that sovereign is not too much aggressive with that power. It is impossible to know what is the breaking point (i.e. how aggressive a government can go with money printing before the loss of faith happen), but once it happens, there is absolute chaos. The sovereign state should not make money worthless, but they can. You are walking a very fine balance with the MMT. And that is before even taking into account the massive boost to complexity trading with other currency issuers bring. That will create a game theory situation with may be impossible to manage by any sovereign state.

MMT or rather a change in the understanding of sovereign currency owners issuing money and the purpose and point of taxation is indeed a serious debate that needs to be had You are largely correct, and I have argued that in other posts on other articles. MMT, and issuing currency is not a 'free lunch'. Indeed you seem to be dismissive of this point, which i have made several times before. Ask yourself why the Government taxes? Under the current model this is argued so as to fund spending, and makes no acknowledgement of how and when a Government issues new money.

But the real debate, and where the real resistance is, should be on why do we need Government regulation, and where does tax sit in this equation. The Government does not need taxes to enable spending. But it does need taxes to manage corporate and individual behaviour, and this is where it is failing dismally. In recent years the four major private banks in NZ, all foreign owned, each reported profits in excess of $1 billion, multiple years in a row. Was this reasonable in a country of less than five million people? In the last 15 years we have seen housing costs inflate at several times the official rate of inflation, to the point of housing becoming comparatively unaffordable for the majority of Kiwis and homelessness, once utterly unacceptable, now fairly common place. Why?

Yes our Government could issue unlimited amounts of currency, but to what end and who would benefit? I have never advocated this despite your perception. In fact I have said there are many pitfalls to issuing currency that must be understood. As to your point; the US has been issuing $Trillons, and their currency has not collapsed. Can you tell me why?

"US has been issuing $Trillons, and their currency has not collapsed. Can you tell me why?"

Because it is the world reserve currency and they need to continually supply more of it to meet demand, they do this by importing a lot more goods than they export, then everyone else uses their USD to buy and sell between each other.

The US dollar has fallen recently with all their QE but their Fed cant keep printing indefinately as crashing the US dollar would become catastrophic

The world's reserve currency is actually the eurodollar and any G-SIB banks, including their global branches, that are a registered US Primary Dealers can emit it.

Historically our governments have been fixated on running budget surpluses and this is what had lead to our low levels of savings and high levels of household debt. The banks have benefited from this greatly of course. It just makes you wonder for whose advantage our government is really working.

Debate away while the Economy slips away.