Finance Minister rules out quantitative easing and negative interest rates, for now

Finance Minister Grant Robertson says NZ won't require unconventional monetary policy in the foreseeable future

25th May 18, 8:00am by Jason Walls

Finance Minister Grant Robertson has dismissed the idea New Zealand has any need for unconventional monetary policy “in the foreseeable future.”

This comes after a Reserve Bank report detailed five options it sees as available, should the Official Cash Rate (OCR) ever need to be cut to zero.

Robertson says he sees no need for any unconventional monetary policy in the “foreseeable future.”

“They haven’t been part of New Zealand’s monetary policy to this point, but this is one of the obligations that the [Reserve] Bank has, to look at all of the tools that are around," says Robertson.

He says New Zealand won’t be at a point where the Reserve Bank needs to implement QE in the “immediate future.”

The options outlined by the Reserve Bank include reducing the OCR into negative territory – as was done by the Bank of Japan – and engaging in quantitative easing (QE).

This was a path taken by the US Federal Reserve in 2008, whereby it bought an enormous volume of bonds and other financial assets in a bid to stimulate the economy.

At 1.75%, the OCR is the lowest it has been. The Reserve Bank is expecting it to be raised mid to late next year.

Assistant Reserve Bank Governor John McDermott told Bloomberg whilst there’s “no imminent prospect” of using any of the five measures, “the probability of needing them at this point in the cycle is higher than it ever was in history” and “it would be silly of us not to be ready just in case.”

McDermott also told Bloomberg that if the Reserve Bank was required to take any of these extreme steps, the Government might give the central bank more capital or indemnify it against any risk of losses or ramp up fiscal policy.

“In that kind of world, I think coordination would be important,” McDermott said.

Asked about potentially ramping up fiscal policy - for example, more Government spending - Robertson says that’s all hypothetical in New Zealand’s case. But he does note that for the countries that have gone down the QE path, fiscal policy has been used alongside it to help stimulate the economy.

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47 Comments

by fat pat | 25th May 18, 9:35am 1527197739

I see financial repression on the horizon. The Auckland housing market's going down along with Sydney Melbourne Vancouver. Inflation is ticking up with petrol prices going up and the NZD going down. Could we see a day when CPI inflation is above 3% and the OCR stays at historical lows? It would be done in the name of financial stability and protecting FHBs.

by Pricklybeard | 25th May 18, 9:24am 1527197078

Inflation is the wildcard, if it does take off the reserve bank with have to raise rates (perhaps quickly) and that will soon make the affordable un-affordable as far as debt goes. The rest of the OECD especially Australia would be strongly effected also. Grant Robinson could be eating his words in time for the next election, time will tell but he basically has to say these things or he might unset the apple cart.

by fat pat | 25th May 18, 10:38am 1527201525

I think in the context of real estate & increasing interest rates. Increased financing costs are not the biggest problem. The problem is the repricing of assets, caused by a change of interest rates. Increased debt financing costs only has a minor effect on net equity growth (from my calculations anyway). Asset price inflation or deflation has a massive effect on net equity growth. The two effects, asset repricing and changes to the cost of debt, are self reinforcing with respect to interest rate changes. Both on the way up and on the way down.

by Yvil | 25th May 18, 2:56pm 1527216964

Agreed but I think financing costs are the CAUSE of asset price change.
Also increased finance costs mean less disposable income which leads to some businesses going bust, that means staff layoffs, these people then don't earn any income to spend on other businesses that, as a result, also go bust... also self-reinforcing

by fat pat | 25th May 18, 6:39pm 1527230352

Possibly, but I think investors also compare the assets return (ie rental return) to the risk free rate of return. Whatever the mechanism we're arguing in the same direction.

by Yvil | 25th May 18, 7:05pm 1527231956

What risk-free rate of return are you referring to?

by fat pat | 25th May 18, 7:31pm 1527233460

If the OCR goes up I would kind of expect bank deposit rates to go up too. I know it's more complicated than that with bank reserves coming from places other than the central bank & domestic savers. You've got iceLIBOR rates and whatnot (incidentaly, they're going up lately).

by Bobster | 25th May 18, 7:31pm 1527233511

The risk free rate of return is the yield for govt bonds. The 5 year rate is about 2.4%, the 10y rate about 2.8%. Yields in Auckland are about an average of 3% or so. That’s the gross yield. So the average rental in Auckland is paying as a net yield substantially less than the risk free rate of return, which implies the property market is seen as having less risk than the risk free rate of return. The net rental yield on Auckland property is, adjusted for the risk free rate of return, less than zero. Haha, good luck with that, it’s an absolute dog

by Independent_Observer | 25th May 18, 7:34pm 1527233684

Wrong Bobster - capital gains on Auckland houses are the risk free rate of return...didn't you hear?

by Bobster | 25th May 18, 7:52pm 1527234738

Oh, silly me

by JimboJones | 25th May 18, 8:27pm 1527236845

Well you do have to account for inflation. If the risk free rate is 2.8 but inflation is 1.8 then the return is 1%. But asset prices shouldn’t be affected by inflation. So even without gambling on capital gains, housing still can be attractive.

by Bobster | 25th May 18, 8:41pm 1527237674

Actually, the 3 or 6 month NZ treasury yield should probably be risk free rate. I suppose the point on yield is, are you getting adequately comoensated for the risk of holding the asset. At current rental yields, your net yield in Auckland is zero of less so I think the answer is...nah

by Independent_Observer | 25th May 18, 7:36pm 1527233772

https://www.investopedia.com/terms/r/risk-freerate.asp

by fat pat | 25th May 18, 10:26pm 1527243969

That's correct but I was referring to term deposit rates, or bank interest rates. At the end of the day that's the risk free rate of return as far as most garden variety property investors are concerned.

by Zack Brando | 25th May 18, 6:35pm 1527230135

The CPI is a joke, for example they include cellphone cases in their basket of goods. I'd suggest most NZ consumers get these cases included with their phones or buy through TradeMe or AliExpress.

Real inflation is much higher than the CPI so many NZ savers are already experiencing the equivalent of negative interest rates. I'd be pleased if someone could debunk what I just said.

by fat pat | 25th May 18, 7:09pm 1527232147

and then there's inflation by stealth like this https://www.nbcnews.com/politics/politics-news/four-day-weeks-bring-smi…

by cs | 25th May 18, 9:17am 1527196652

The monetary tools won't do much. You can't cure a private debt crisis with more private debt. QE doesn't do much for the real economy. Fiscal policy will be the only truly helpful strategy. Slowly more and more central bankers seem to be gently hinting at the need for stronger automatic stabilisers that just kick in and are immune from hysteria about increasing public debt. A universal job guarantee at a decent basic wage would be the ideal version of this.

by Withay | 25th May 18, 9:40pm 1527241259

Is mis allocating capital/subsidising really a way to cure a private debt crisis though?

by cs | 26th May 18, 7:16am 1527275801

Strong automatic stabilisers are what keep your economy from completely imploding Great Depression style and that is why central bankers increasingly go on about them. Hardly a mis-allocation. Yes government can spend badly. But it can also spend wisely. Corporations and private individuals are also quite good at spending unwisely and mis-allocating resources. And a job guarantee for involuntary unemployment caused by a financial crash (not of the people's making usually) is a very wise use of money in that it prevents the long term negative effects of unemployment. Once demand and confidence is restored, government can pull back as workers return to the higher paying private sector. If the private sector is investing and expanding then the deficit can reduce.

by Withay | 26th May 18, 7:09pm 1527318550

I may be missing the full picture here but for the government to spend it needs to either tax or borrow. Tax is taken from successful functioning individuals/businesses which will restrict them in future. Borrowing is taxing our future money without addressing the root cause.
Wouldn’t it be best to focus on sane credit/money creation policy rather than try to deal with the negative consequences that they currently create. Address the cause, not the symptom otherwise we’ll be having the same conversation in around 10 years?

by Alter Ego | 26th May 18, 10:04am 1527285852

The "Monetary Tool" is at it again... Give me a break.

https://www.marketwatch.com/story/tax-breaks-for-home-mortgages-to-sink…

by Bobster | 25th May 18, 9:49am 1527198597

It all seems slightly surreal that at a time when our economy is nominally going great guns with solid growth and low unemployment that the minister and RB are having a public discussion about what desperate measures to employ to keep the economy on life support? I am skeptical about how strong the underlying economy really is as I think much of that growth comes from this giant credit bubble, but I didn’t think that was a widely held view. This discussion and the obsession of some with keeping interest rates at bottom lest there be Armageddon do not indicate to me a great deal of confidence.

by Retired-Poppy | 25th May 18, 10:05am 1527199506

Bernanke quote from January 10, 2008 "The Federal Reserve is not currently forecasting a recession" It is logical scripting our Finance Minister can't see one in the "foreseeable" future either.

by Bobster | 25th May 18, 10:16am 1527200211

Yeah, it’s just a bizarre conversation....

by SmoKey | 25th May 18, 11:26am 1527204410

Wonder what they know about the state of the economy and affairs, that they are not able to tell in open terms. If National had come back to power would this have happened ? Labour seems to be caught in many developing adverse situations, which they might not have anticipated. Now they have to fire fight. Key's timing to quit looks all the more of a calculated, wise move now.

by kpnuts | 26th May 18, 2:17pm 1527301075

totally - why even raise the subject - 1000's of unfilled jobs across all levels from unskilled labour to high end IT, engineering , medical - almost every major Kiwi Industry expanding and becoming billion dollar enterprises

Wages are starting to rise significantly - 55,000 homecare workers last year many getting 20% rises - 5000 MH and addictions in July - and we know that teachers, nurses, police and other MOH/MSD/Corrections/ roles will follow in the next two years - probably against a static housing market

It seems that Grant Robertson - like WP wants to project that the whole world and NZ is in doom and gloom status in order that his very very average handling of the economy will look like sensible management!

by Nic Johnson | 25th May 18, 8:46pm 1527238009

It is a bit concerning that both Minister and RB have felt a need to publicize this this week. Albeit Westpac's parallel universe of flat house pricing is still the biggest warning of the week.

by Patches | 25th May 18, 10:08am 1527199698

Odd they are even considering this.The evidence as to the efficacy of such policies over seas is limited at best. With asset values at astronomical prices everywhere you look and debt reaching new heights, one could argue they have done more harm than good...

by Alter Ego | 25th May 18, 10:27am 1527200871

I think Grant should Grant the wishes of Westpac Chief Exec...and drop all Inflation on houses for 30 years....plus.

I do not wish to be negative,

I do not want to rely on Inflation...like some I could name.

I just want a steady Market, not a Gamblers Den and Balloon Shop.(Bubble and Squeak..on this fair site)...all sold,... sorry trying to be sold.. with the same mantra..." Look at me..I got....Potential"

by Yvil | 25th May 18, 3:02pm 1527217340

We can all "want" or "not want" whatever, it doesn't really matter, the market will do what it will.

by theglc | 25th May 18, 12:26pm 1527207968

So when they open up their toolbox all they will have are band-aids and band-aids wont fix the hemorrhaging caused by a severed head

by Boatman | 25th May 18, 1:34pm 1527212067

LETS JUST CLARIFY ................... QUANTITATIVE EASING IS NOT HIS CALL .

The Reserve Bank is an independant body ( like the courts/ judiciary ) and for very good reason it must never to be subject to political manipulation

by Yvil | 25th May 18, 3:04pm 1527217472

Well have you not heard, the government are infiltrating the RBNZ with some of their own "experts", 3 out of 7 I believe.

by Ex Expat | 25th May 18, 3:59pm 1527220792

We depositors know we are stuffed long term. We're never the priority.

by Chessmaster | 25th May 18, 11:48pm 1527248921

That's exactly what I thought. Poor CoL govt still learning the ropes. Maybe he should be made to apologize for these comments, his undermining the RBNZ. Same offense as standing in a plane when seat belt lights are on haha. America have Trump, we have this new govt ministers. Who needs clowns anymore!!!

Wait till the next quarter results come in, inflation will be well below target and GDP taking a massive hit with farming woes. Some sort of QE measures will be necessary. Grant has no idea.

by Ludwig | 25th May 18, 1:41pm 1527212473

When the pressure comes on, you can bet that the rbnz will be buying up loads of govt debt, just like the ECB is doing now, because no one else wants to buy that junk. Whoever ploughs money into govt bonds deserves to lose their shirt down the track. They’ll keep ramping up the debt as always without any intention of paying it back.

by lalaland | 25th May 18, 5:32pm 1527226369

by Yvil | 25th May 18, 3:13pm 1527218024

WOW 2 weeks after the MPS, when the RBNZ said the risks are evenly balanced between interest rate rises and cuts for 2019, they come up with a scenario where the OCR is cut to zero!
Yes, I understand, it's in case the economy takes a sharp turn for the worse but still, they have not just thought about it, they have spent time studying a zero OCR, and have even published their report. For anything to happen in real life, it must first seem possible in our minds... and that part is done.

by lalaland | 25th May 18, 5:32pm 1527226354

by Yvil | 25th May 18, 7:13pm 1527232402

by Andrewj | 25th May 18, 4:32pm 1527222745

How can Mr Orr be happy to go for %10 returns when he runs Kiwi saver but somehow supports zero return for depositors

The reality is demographics are against them, high house prices along with market returns for rent have pushed a generation of Kiwis into penury. As the baby boomers move on the generations underneath stuck with impossible house prices and rents that don't reflect earnings are going to vote for change.

ZIRP is a sop to banks. it will maintain asset prices to the detriment of the young, eventually the cogs will turn.

by Pragmatist | 8th Jun 18, 10:38am 1528411122

If you put your money in a NZ bank, you get near zero returns, because you get have near zero risk. You want 10% returns you put it somewhere that there is a higher return because there is a higher risk.