By Raf Manji*
This morning the Reserve Bank of New Zealand (RBNZ) announced it would implement a $30 billion Large Scale Asset Purchase Programme (LSAP) of NZ Government Bonds. As I indicated in last week’s article, this was expected and follows on the back of the Government’s economic support package announcement last week of a $12.1 billion injection of new spending.
The aim of the RBNZ programme is “to provide further support to the economy, build confidence, and keep interest rates on government bonds low”. This will allow for the purchase of “up to $30 billion of government bonds, across a range of maturities, to be purchased over the next 12 months”.
So far so good. The goal here is to address the short-term rise in interest rates in the local bond market, across the yield curve. This comes, as one would expect, as a lack of confidence and resulting liquidity concerns see yields rise. To counter this, the RBNZ states that it will be purchasing NZ government bonds in the secondary market, using central bank money.
It’s important to note that it does not state it will buy government bonds directly from the Treasury. This needs clarification because this suggests the RBNZ is focused more on keeping interest rates down in the bond markets, rather than actually funding the government directly to help it support the real economy.
The Minster has stated his support for the programme noting;
“The Minister supports the use of the Programme by the [RBNZ] Monetary Policy Committee as a monetary policy tool to reduce borrowing costs for New Zealand businesses and households, boost credit and lower the value of the New Zealand dollar - all of which is intended to stimulate investment and boost demand for New Zealand goods and services.”
As I noted in last week’s article, this is potentially heading down the wrong path. We are experiencing a huge demand shock driven by global pandemic, not tight monetary conditions or rising unemployment. Lower interest rates, whilst important for bank funding and liquidity, are not really the solution to this problem right now.
There is not going to be any new “investment” whilst businesses are going bust (see Air New Zealand for details), and people are frantically working out how to pay basic bills and stock their cupboards. This is exactly the problem that the post-GFC approach experienced.
All the new central bank money that went into the secondary market to buy government bonds and a whole range of other securities, ended up being redirected into financial markets, setting them off on a very, long bull market, which has now come to a shuddering end.
What the RBNZ needs to do now is to make clear that it can and will purchase government bonds directly from the Treasury at 0%. These funds should be used to fund the current and forthcoming economic support packages. The RBNZ can and should still support the secondary bond market but it should not make the mistake of previous international QE programmes, and focus entirely on the supporting the financial markets.
*Raf Manji is a strategy and risk consultant.