David Hargreaves says with the Official Cash Rate now quickly moving towards zero we will all need to know as soon as possible what alternative weapons the Reserve Bank proposes wielding to shape monetary policy

David Hargreaves says with the Official Cash Rate now quickly moving towards zero we will all need to know as soon as possible what alternative weapons the Reserve Bank proposes wielding to shape monetary policy
Going boldly, but to where exactly? As interest rates head for the science-fictionesque negative territory, we will all need to know what that means and how it works.

I have a longstanding complaint, or gripe if you will, with science fiction films and sci fi TV programmes.

In certainly none of the ones I've ever seen has anybody come up with something more satisfactory than "cloaking device" to describe an apparatus that makes things disappear from sight.

Yeah, okay, I mean it does the job as a description, after a fashion. But it's neither here nor there. Cloaking device. It's vague and doesn't really impart a lot of information. How about an "Inviserator" or a "Disappearex" instead? Something with a bit of elan and that, well, actually says something.

I've got a similar problem with "unconventional monetary policy". It points us in the direction of monetary policy with a twist. But it doesn't really tell us what that entails. Or how we should deal with it. It also sounds a bit like a lab experiment. And that makes me nervous. 

And if the link with science fiction seems a bit tenuous, well, I for one find the prospect of NEGATIVE interest rates pretty much out there in the stratosphere. Hey, look, when I deposit money with you, I expect YOU to be paying me - not the other way around! It's all pretty sci fi to me. Twilight Zone even.

This though is the way we are heading, and seemingly at some speed.

Speeding towards the unconventional

Indeed, dare I say we are heading there at greater speed than the Reserve Bank had imagined.

In May last year the RBNZ penned a Bulletin Article looking at unconventional monetary policy. The preamble stated: "While there is no need to introduce unconventional monetary policies in New Zealand at this time, it is prudent to learn from other countries’ experiences and examine how such polices might work in New Zealand if the need arises." 

I certainly got the impression at the time that the article was one of those somewhat abstract pieces of thinking following a 'just in case we might ever have to do this' rationale. 

Just over a year later and Reserve Bank Assistant Governor Christian Hawkesby gave a speech in Japan, which curiously the RBNZ then posted on its website nearly a week later. The impression certainly I had was that the central bank wanted to make a point (hence posting a speech days after it was made). And the piece that stood out in the text was Hawkesby saying: "Having effective unconventional policy options expands the toolbox of a central bank, which is naturally more relevant in a low interest rate environment. In this spirit, we published a Bulletin article last year on the practicalities of unconventional monetary tools in a New Zealand context, and we continue to learn from the lessons of our central banking cousins.

"It’s better to have a tool and not need it, than need one and not have it."

Maybe we will need them after all

So now a year after a fairly, it seemed esoteric article about something we would never have, we suddenly get referenced back to that article. Clearly that indicated that the RBNZ was indeed working toward the possibility of the unconventional monetary tools being something we might need after all.

Even then though Hawkesby's second comment there about "better to have a tool and not need it than need one and not have it" suggests that the unconventional route was not one seemingly imminent. 

Now not even three months after that we've got an RBNZ apparently "well advanced" (words of Governor Adrian Orr) on unconventional policy work and with Governor Orr stating that it's "easily within the realms of possibility that we might have to use negative interest rates" . 

For the record in terms of talking about the "full tool suite" as he termed it of unconventional measures that might be used, as well as negative interest rates, Orr mentioned asset purchases, "different kinds of forward guidance" to be made by the RBNZ and "other forms of intervention". But that's as much detail as we've really got at the moment. How any of this would work in practice, well, we would need to find out.

This is where it would be hoped the RBNZ starts to get very proactive. 

Entering the stage

Since our central bank acted, it hoped pre-emptively, last week by slashing the OCR 50 basis points, the global economic situation has only darkened. Come on down you unconventional policy tools, you might be taking to the stage rather more quickly than anybody thought - up to and including RBNZ Governors.

So, it's to be hoped, and here to some extent I echo the words and sentiments of ANZ economists in a recent piece of analysis, that the RBNZ lays out a possible plan for unconventional monetary policy soon. 

I think we need to see what all the potential options are and have them well articulated as to how they might work and what their ramifications might be.

If the plans really are "well advanced" I don't think there's too much to be lost by at least sharing on a generic level how they might be applied.

Granted, I can see why the RBNZ might want to keep the nitty gritty of exactly what it might use and how to itself. Market participants are resourceful when it comes to pre-empting measures in a way that can financially benefit themselves. It's only to be expected.

Likewise though, I would not like to see a situation in which the central bank, leery of giving too much detail in advance, rather jumps the market with measures before everybody knows exactly how they will work.

If we do indeed go down the 'unconventional monetary tools' path - and right now I think it's hard to imagine that we WON'T - then its certainly not just a markets story.

RBNZ must think broadly

Therefore the RBNZ should not be building its strategy just around how it communicates with the markets and how it will directly apply measures to those markets. It will need to think much more broadly than perhaps as an organisation it is accustomed to doing.

For example, there was a clear enough logic from the RBNZ perspective in its decision last week to take the nuclear option of a double OCR cut. It certainly wrong-footed the markets and arguably produced an outsized reaction, particularly in interest rates and the currency. 

But if you look at something like the currency movement, that was a nasty shock for businesses that might not have been hedged against such a sharp movement. And while you might say that businesses obviously need to look after themselves in such matters as currency fluctuation, it's hard for them to second guess currency fluctuations if they are dealing with a central bank actually attempting to pull the rug out from under the markets.

The point is as we move toward the real uncertainty posed by a likely move to 'unconventional monetary policy' we are going to need some certainty provided by the RBNZ. We should have some idea what to expect before anything is applied. And just how it works.

Otherwise the potentially difficult times ahead could be made even more difficult. So, full and frank explanations please.

Oh, and can we think of some better term than 'unconventional monetary policy'.

How about "The Reserve Bank is set to deploy its De-interestrator"?

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

49 Comments

Comment Filter

Highlight new comments in the last hr(s).

It.ll definitely require unconventional policy to fix the main problem the RBNZ faces.

How else is NZ going to recover from the $5 Billion per year profits being taken by Foriegn owned banks.

But this is all cloaked in the well hidden from public “Investment Account deficit”.

I wish the RBNZ would show NZ the amount of profit Foreign owned companies Rort from NZ.

It’s $$20 Billion a year.

Maybe instead of a “de interestrator”, the RBNZ could try a “de foreign owned profitrator”.

The scale of the entire problem is $400 million profit per week to foreigners.

In 2 1/2 weeks, they’ve taken $1 Billion profit.

Staggering good cloaking though.

The 'good news' is that when New Zealand recalibrates the worth of its assets, it will be those very same foreign owners and investors that take the hit.
Bank bad debt, foreign-owned bank debt mostly, is going to soar. QE or not; Unconvention Means or not, those banks are going to have massive Write Downs as New Zealand citizens and companies (the latter first and hardest) default on their loan obligations.
Hopefully, those banks will have recapitalised enough in time to write off that additional capital as Bad and Doubtful Debts, but we shall see... Adrian Orr looks to be doing the right thing, even if it was delayed by his predecessors. So...there is hope!
(NB: Lots of holes in that rant, but you get the gist!)

Leonardus - of interest, how much capital do you think these foreign owned banks invest in NZ ? Ok, its tens of billions - If they don't who is going to fund the show ?

11
up

“Unconventional monetary policy” - The logical extension of an illogical monetary system that relies on exponential growth to function.

QE is the ultimate end to this Unconventional policy.
Is it because both RBA and RBNZ are expecting the next GFC to start here in ANZ ?

The essence of the central bank puppet show is exactly this premise. In a world desperate for some monetary answers, some real damn money, central bankers can only think and act in terms of theater.

What can I do to make you think I’m doing more than you ever thought I would?

As ridiculous as that sentence is to write, it is a perfect synopsis of monetary policy in the QE-era. It was the very basis for not just Japan’s QQE but also the Fed’s QE3 (open ended). There’s no money printing in monetary policy because there’s no money anywhere around the central bank. What’s left is only the theatrics.

As I always say and write, if you have to do it more than once then it didn’t work the first time. Quantitative easing cannot have been quantitative if you do, and it opens the door to questions about exactly what is easing. Repeating the word over and over does not make it so. Link

Is there a good alternative ? Wouldn't logic suggest you would ready be using it ? Funny how people think there is some other cure, its like climate change people that think some giant technological advance is going to save us. Better start pulling out all the stops we don't want to end up like Venezuela or Zimbabwe do we.

That question could be applied to the whole history of central banking policy, though, and they've tried various things over the decades to avoid, address and alleviate cyclical economic events...as well as in some cases, precipitating them. But they're not all the same things, so clearly there are different approaches that can be taken and it seems like this latest one is the latest guess.

"J" for "Junk" - Neoliberal Economic Plocies, it's been followed for a while. Who is surprised now by it's predictable consequences?
This article is way behind the curve...whatever political color, NZ has been just drifting along in the toxic stream

21
up

This is dumb. Just have a recession and get it over with. A recession and drop in speculative assets and businesses is what we need. It separates the productive enterprises from the overblown and unproductive. Delaying it is just causing more harm than good.

Staving off recession in some irrational fear of bank failure just so we can keep going with ever decreasing yields is just dumb. Learn what cycles mean with the type of capitalism we have.

Exactly right . Spot on. These are truths that cannot be told lest they undermine confidence

There is no confidence, people buy negative bonds because they hope to sell them to someone who goes more negative. And we always learned that water runs down a hill, hang on, or was it up hill. Good luck with fingering where we go.

I think were headed for recession regardless, just depends on how bad that recession is. Plus I agree, I've been through lost of recessions before and to be honest they're not that bad. People take stock of their lives and invest more in computer games. ;)

...actually NO recession, as that would be deflationary and would lead almost certain to a full blown debt default.
Negative interest rates from a sovereign perspective is forcing inflation as debts are slowly reduced, so that's the way to go in this messed up 'J' for Junk Neoliberal monetary thinking.

Even in a negative interest environment, adding debt is inflationary as it adds to nominal GDP growth so that's the way its gonna be to a point,where negative rates managed to reduce global debts to a manageable (repayable) level

So a modest 12 percent fall in real estate values, would equate to a sizable 50 percent of current GDP, without any other effects of diminished wealth. The RBNZ has fully bet the house. Maybe homeowners would net benefit from negative rates and lower house values. ?
Talking of cloaks when John Key and President Xi signed up Kuangchi Science to access New Zealand's airspace, back in the Auckland boom days. Kuangchi had the "invisibility cloak"
https://www.dukechronicle.com/article/2017/10/how-one-graduate-student-a...

Unconventional monetary policy, sounds extremely dodgy. Soft lending will be next, oh wait the Australian's banks are already doing that to bolster their housing market. You know the kind of risky lending that led to the Global Financial Crisis.
So since savings rates will be dropping to zero too, the RBNZ needs to restore public confidence in the NZ banking system otherwise Kiwi's will be looking for other savings/investment methods outside of the banking system (And no not property since that's too risky and needs to bottom out).
We at least need the Savings Deposit Protection Scheme of up to $50k per bank, which every other Western country has except NZ which is extremely poor. This needs to be implemented as soon as possible THIS YEAR!

I'm not waiting for the "savings deposit protection scheme", I'm going for the "safe deposit box protection scheme". After tax returns on 2.9% term deposits are not worth the risk when this thing falls over.

Sounds a good idea Pragmatist, I was also thinking of moving some of my financial assets off shore to a home country that does have "savings deposit protection scheme", NZ seems to be very much dragging it's feet on this basic requirement for protecting its residents and citizens.

Misery loves company - recorded bank vault cash decreased from $888 million in April to $$603 million in June - evidence

If you look at the data across the past few years (goes as far back as Dec 16 unfortunately) it's very noisy. A similar fall in deposits is seen in Apr - June last year from $953 - $685 million. 2017 however was:

April - $735
May - $782
June - $728

Phew, that's a relief, other than the fact there are ~$354,682 million candidate deposits that the owners might seek to physically monetise, in the event of a liquidity crisis.

And just for the record, banks claim vault cash as an asset not a deposit liability.

Wouldn't it be in both? It an asset they have on hand, but it got there by being deposited by a customer so is a deposit liability?

Yes and No. A customer offers a bank cash notes as a counter transaction and in return a digital deposit is registered in the customer's account. The bank deposit liability is now offset by the cash note asset.on the balance sheet. Conversely, both sides of the balance sheet are written down when a customer wishes to make a withdrawal in the form of physical notes.

Similarly, a bank borrower offers up a mortgage contract as an asset and the bank writes up the customer's deposit account with the loan principal in return.

How can kiwis 'net' get out of the banking system though. No matter what I buy with money from the banking system, it ends up in someone else's bank. Only exception is taking it offshore or holding cash. Example, I I buy gold, the money ends up in the gold sellers account. Others thoughts appreciated.

No, you are on the money.

If you buy gold and hold it physically, you are out of the banking system. Or ownership of any assets really.

The good thing about gold though is that it tends to increase its value in times of economic uncertainty.

Following Neoliberal Economic Theory, it's hard to understand the term ' unconventional monetary policy' as there is nothing unconventional about it. Building up financialised economies on a mountain of debt inevitably reaches a point where the debt can not be repaid.

Zero to negative interest rates are the logical consequence as an indicator that the debt default level has been reached. Short of a full blown default, zero to negative interest rates moves the debt default slowly ahead, wiping out savings on the asset side of the equation.
Good old inflation to wipe out debt...those were the days...
Move along...TINA...unfortunately now

This is an interesting read about negative interest rates
http://sacred-economics.com/sacred-economics-chapter-12-negative-interes...

Interesting article.

Yes historically, debt jubilees solved the problem, but in today's world, money creation is privatized with few exemptions to the rule, thus debts are not forgiven. This trend started during the Roman empire. There was no debt jubilee nor negative interest rates...the rest is history, the Roman empire collapsed.

from the article:
"the debts will never be repaid. Either they can be kept in place anyway, and debtor individuals and nations kept in perpetual servitude, or they can be released and the slate wiped clean. The problem with the latter choice is that because savings and debt are two aspects of a whole, innocent savers and investors would be instantly wiped out, and the entire financial system would collapse. A sudden collapse would result in widespread social unrest, war, revolution, starvation, and so forth. In order to prevent this, an intermediate alternative is to reduce the debt gradually..."

ed: ...thus the introduction of negative rates of return, a slow moving default. This is a first in the history of monetary management.

Also of interest are first estimations of a negative interest rate, that would manage to bring the level of outstanding debts to a level that they can be repaid:
- 25%.
Hold on for the ride doen in the meantime and hold gold as a hedge against currency depreciation, trade bonds for asset appreciation, or use your savings for consumption, but circumventing the banking/credit system by repaying your private debt with a 10% premium.

It's like watching a RBNZ snail inch it's way across a very busy road: Liam Dann on the Governments new deposit-protection scheme and how it still hasn't been implemented yet, even though there a flash red lights all over the place. Herald article: https://www.nzherald.co.nz/business-video/news/video.cfm?c_id=1503079&ga...

It isnt actually the RBNZs job to shape monetary policy. Tail wagging the dog.

What we really need to know and be told but won’t is WHY supposedly all this arcane monetary stuff is neeeed. Won’t say because might scare folks. But plainly it is deflation and risk of bank default if there is a world recession that reveals more toxic bank nonsense like 2008 did. Otherwise pray tell WHY is business cycle not permitted to operate?

Yes, I can remember hearing about that speech the Assistant Governor of the RBNZ, Christian Hawkesby, gave in Japan some months ago, a week later when it was picked up by the New Zealand media.

If my memory serves me, he also said there would be no need to further cut the OCR this year! So when it was finally reported in NZ the NZ Dollar took off. But we all know what did happen to the OCR since then: a .5 cut.
I wondered at the time why on earth he would announce this 'no-more-cuts-this-year' in a speech so far away in Japan especially when he knew it would inevitably be published in NZ and push the NZD up. And why did it take a week or so to publish it?
So, I came to the conclusion that this was how the RBNZ was going to make all future announcements i.e. in some remote country in some obscure speech. I shouldn't have been surprised had the next policy announcement been made first to financial planners in Outer Mongolia.
However, as it turned out this new process wasn't followed up. They must have thought better of it.

Goodness!
~50% of Aussie mortgage holders who recently went to refinance their mortgage loans, got knocked back. This time last year that number was 5%. What does that 50% do now?
From this 60 Minutes Doco that just aired in Aussie....
https://www.youtube.com/watch?v=AB6yM9puTY0&feature=youtu.be

Some familiar faces in that one, such as John Norris from Bricks and Slaughter 2 with his small portfolio of properties all bought on interest only @ $5700 per month (until the banks bumped him to P & I pushing his monthly payments up to $8949).

A great example why "interest only" loans should be outlawed IMO for almost all retail lending unless you are adding new supply. They basically skew the market, suck dumb people into believing markets only move one way and create huge risk for financial markets.

Monetary authorities should all have DTI limits in their toolbox as well as all forcing sensible LVR limits, never below 20% IMO. When the market starts heating up, the DTI limit of 5-6 should kick in (to ensure loan repayments are actually funded by productive work) and LVR limits should increase. When the RB started measuring interest only loans in NZ in 2015 they were 41% of all loans written. https://www.rbnz.govt.nz/statistics/c32

Since then they have been trending down and now are around 27%. I suspect the banks realise they are digging themselves into a hole and now with the RB measuring it, expect potential future legislation. They still make up over a quarter of existing loans though, a real problem if/when things turn.

Check out the RBNZ website for Official Information Requests and their answers. A treasure trove of information. Cheers.

Thanks I did, and was surprised to note the contradictory mess of answers the RBNZ presented in response to the questions tendered in this OIA request - Banks and money creation (PDF 413KB)

All I can say is "show me the money" (i.e.10% reserved bank cash at hand on any bank ledger) with reference to question 9.

Bank capital is not calculated as a ratio with respect to cash deposits, but with reference to adjusted RWA. Regulatory bank leverage restrictions moved to the asset side of the balance sheet many decades ago.

The RBNZ should have referenced this link entitled: John Titus - Mommy, Where Does Money Come From? A discussion of Professor Richard Werner's Paper

Dark clouds are gathering.
You know the saying..'When America sneezes, the World catches Cold'.
Time to be as Unconventional as one can, starting with the Central Banks, you think ?

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=122...

I like how the article claims that the US is holding up the world economy. The distortions are from their theft of wealth from the rest of the world. There is a point where a customer gets cut off from credit.

They still are the largest importers, right ?

Very large. They are still 10% of our export market at the moment.

There are already negative interest rates in the EU. With negative interest rates failing to do anything except prop up the global bubble the problems aren't going to go away. When we head into the crisis after this if there are negative interest rates everywhere then the next option is to cancel debt. Debt cancellation could be by just writing it off across the board, cancelling bonds or bankruptcy.

It's time to watch what Japan does this time seeing their central bank owns most of the financial markets. Also watch out for big collapses like General Electric.

May be I should borrow on my house and buy gold, and wait for the next stage of negative rates, which would be debt write off ?

Probably do that in the next crisis. If any of the negative rates are transferred to borrowers the amount will be tiny. However the crisis after this one borrow and buy gold. Secure the gold and hopefully the debt write off will be substantial. At worse you end up with very cheap finance on a pile of gold.

I feel a very important point has not yet been raised in the comments, the picture is of a Starfleet vessel, of course Starfleet vessels do not have cloaking devices due to the treaty of Algeron, I suggest a Klingon or Romulan ship may be more appropriate.
;)

SPOT ON!

I am in the camp that firmly believes that the central banks across the world haven’t got the faintest idea about what will happen next. The only thing they know what to do is cut interest rates but that probably stopped working effectively a couple of years ago. In April the IMF produced a paper for the central bankers showing them how to introduce negative interest rates. They don’t seem to be having much effect in Europe where they have been in place for a little while now.

I think they are all hoping for a black swan event to end it all and cause a global meltdown. They can blame the other fella’ and say but we didn’t see it coming don’t blame us!

It’s all probably going to come to a head either this year or next with only a few people - mainly Interest.co.nz readers - Having had any idea that disaster was just around the corner. Preparation and an awareness that something financially devastating could be just around the corner. Protect your assets be it property, cash in a safety deposit box, gold, silver or crypto- it’s up to you!

Is Brexit or Hong Kong going to be the next Black Swan ?
The former coming soon while the latter may already be here.
Though Back Swans are supposed to be unexpected, may be this time it is different ?