Should New Zealand start printing money? Westpac put out a bulletin on Friday on the topic of quantitative easing (aka printing money, or QE), discussing whether New Zealand was likely to end up going down the same path as the US, UK and Japan by turning to what many view as the last resort of monetary policy. Westpac economists Brendan O'Donovan and Sharon Zollner argued that it was not likely that the Reserve Bank would have to resort to QE, unlike its larger central bank counterparts. They held that the Bank's conventional monetary policy tools still had room to be effective, and its "more traditional tools and channels for monetary policy are likely to keep working longer than in many other countries." They gave three reasons why:
New Zealand is less likely than the US or UK to run out of traditional monetary policy ammunition for three reasons. Firstly, our neutral interest rate is relatively high, due to being a small, far-flung, seriously indebted nation. The Reserve Bank can therefore cut rates much further below "neutral" than in other countries. Eyes light up here at borrowing rates under 6%, whereas in larger rich economies such rates are the norm. Secondly, interest rate cuts have been largely passed through into the most popular retail mortgage rates, thanks to our solid banking system. In contrast, the central banks in the US and UK (where their banking systems became dysfunctional) have struggled to get traction despite equally large cuts in the overnight cash rate. The NZ housing market is already showing some signs of responding to the historically low mortgage rates now on offer, with housing sales well off their lows. And importantly for consumption going forward, the mortgage debt servicing burden of NZ households has come off considerably over the past 6 months and will continue to do so as more mortgages roll off onto lower interest rates. There is therefore still a considerable amount of stimulus from monetary policy easing in the pipeline." Thirdly, we are a very open economy with a floating exchange rate that tends to get trashed when bad things happen. A sharply lower currency facilitates the necessary economic adjustment away from spending towards saving, and from consuming to exporting. It cushions the fall in commodity prices that inevitably accompanies a slow-down in world growth. While the Reserve Bank cannot set the exchange rate, and can influence it only at the margin through intervention, the NZD generally tends to move in the right direction to reinforce the thrust of monetary policy. This puts us in a much better position than the likes of Japan, whose currency has strengthened sharply even as their exporters choke (Japanese export values in February were half those of a year earlier).However, the Westpac economists did not go as far as saying these reasons provided certainties that New Zealand would be able to avoid QE, with few signs that the economic situation was improving.
It is therefore less likely that New Zealand will end up going down the QE track. But never say never "“ we are already a year into this recession and there are few signs of things improving. Interest rates and the exchange rate are currently defying the Reserve Bank's wishes by tightening. And it is far from clear that the interest rate premium NZ has to pay to raise funds offshore in this environment has peaked. The RBNZ may yet find itself fertilising the money tree. Given the dramatic increase in bond issuance that the Treasury is forecasting over the coming years, it would be very convenient for the Government if the RBNZ were to absorb some of it through QE. But under the Reserve Bank Act the RBNZ has operational independence in how it conducts monetary policy to meet the inflation target, and could therefore (ostensibly) not be pressured into helping out on this front.What are your views? Will New Zealand end up jumping on the central bank bandwagon? How bad would things have to get in New Zealand before the Reserve Bank starts quantitative easing? Thoughts and comments below please.