Reserve Bank Governor Adrian Orr says he doesn't think New Zealand's banks would actually be ready to manage negative interest rates.
His comment came at a media conference on Monday following the RBNZ's decision to slash the Official Cash Rate from 1% to just 0.25%, with a pledge that the OCR will be kept at that level for 12 months.
As interest rates move towards zero that opens up the requirement for the central bank to utilise unconventional monetary tools.
Theoretically that could include moving to negative interest rates.
However, Orr says the RBNZ's thinking is that if and when further monetary stimulus is required "we think the most effective tool would be the large scale asset purchases".
“I think in a simple sense not all banks are ready to even actually manage negative interest rates," he said.
"We ourselves at the Reserve Bank are ready. But not all retail banks are ready.
"....And we want them to be focusing on more important issues at this time rather than that readiness. More important issues around looking after their customers.”
The RBNZ's preferred approach therefore should more monetary policy assistance be acquired during the current economic crisis will be at least in the first instance large-scale buying of Government bonds to pump liquidity into the system.
Assistant Governor Christian Hawkesby said the RBNZ was in close contact with the country's banks and they were telling the RBNZ they are well-funded.
“They are not asking for more liquidity but we making it very clear to them that it is available if needed.”
The RBNZ didn't want to be drawn on whether New Zealand would go into a recession - though Governor Orr did say that some of the many scenarios they were currently working on did have NZ experiencing more than two quarters of negative growth (the technical definition of a recession).
On growth and inflation, Orr's comment was: “We are expecting growth and inflation to be lower.”
Deputy Governor Geoff Bascand said the central bank did expect the current crisis: “to be a severe impact on the economy and on people.”
“That’s the unfortunate circumstance that we are in.
"We don’t have specific numbers…but we are saying that this is going to spill through some business failures and some unemployment. That is what we are trying to lean against and provide support for the economy.
“...We acknowledge this will harm a number of people and the New Zealand economy."
Orr noted that New Zealand currently had only small numbers of virus cases. If NZ ultimately gets a wide outbreak it would be “a whole different ballgame again”.
38 Comments
"Reserve Bank says it wants the country's banks to be focused on looking after their customers". Really!??? Then how about introducing a Saver Deposit Protection Scheme! NZ is still the ONLY Western country that does not have this basic requirement for their customers!
Chances of OBR are increasing, Labourites/Nats don't care if people lose all their retirement term deposits with a massive haircut, Jacinda will say it's tough on everybody so harden up while you are dying.
Don't know which is safer,bonds, TDs, collapsing managed funds or Harcourt's??.
BTW the Labourites have not yet brought up the idea of borrowing billions to toss in to the Cullen Fund; they retrospectively rubbished Bill English for not doing so while he was borrowing $300mill/week after the Christchurch disaster. Which may pale compared to the aftermath of this bug.
$250k per bank...... otherwise The banks that so need your deposits to maintain their ratios will find their customers running for the hills! Then those well funded banks will be well ......
Given the amount of funds New Zealanders have on deposit the $30k that was previously touted was a joke! The RBNZ along with the FED et al are looking at bailing out corporates but who will bail in the banks? Yep, it’s customers. What a mess. Looks like there might be a rush to buy government treasury bonds.
I guess this is supposed to bring certainty, if they have assured us that they will remain at this for 12 months. They should have tried to get interest rates back up again during the good times we have had. Rather than cut cut cut, for years, when NZ has supposedly been doing really well.
"looking after their customers" - is this the reason why they postponed new capital requirements ????
so in just one day , reserve bank has crossed out everything they have been talking for the last year , including:
new capital requirements
term deposits insurance
the very recent talk about no "knee jerking " to the virus
The major difference this time to the GFC is the role of central clearers… whilst the widespread bank creditworthiness concerns are likely to be less, the requirement for FI’s to be posting margin calls is likely to have a major impact as it drives a need for liquidity to meet those margin calls.
But you cant just halt markets... there are cashflows and payments that are required to fund real world activity and with it the banks. You can just halt trading and assume it wont impact the real economy.
Read the announcement this morning "a Large Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions"
Which rich buddies are you referring to?
Honestly.. is there anything worse than a financially and economically illiterate keyboard warrior throwing stones at something he doesn't understand?
They are buying NZ government bonds... i understand the price of them will be driven up and in doing so the yield down. What rich buddies are you referring to?
The purpose of buying bonds is to drive down the yield curve which is used to price all term lending and borrowing activity. Driving down the yield on government bonds is designed to make borrowing cheaper for all. Please, try reading a book. You're welcome.
I'm with you on the mythology, I really resent it a lot. It's used as a facade to signal virtuousness rather than any commitment to Maoridom. No Maori apparent anywhere in RBNZ management (and there are candidates more than capable of being there). If there are schmes going on behind the scenes I'm very happy to be proven wrong.
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