ANZ economists now predict the Reserve Bank will increase the quantitative easing programme to $90 billion by August if not sooner

Put your hands to your ears or you may be deafened. Less than a week after the Reserve Bank again brought out its formidable cash-spraying 'bazooka', economists at the country's largest bank now pick the RBNZ will be ready to launch yet another salvo by August if not earlier.

Last week the RBNZ increased the size of the quantitative easing programme (QE) from $33 billion to $60 billion.

But already, now ANZ economists say the programme will need to be increased to $90 billion.

The RBNZ launched its bond buying programme less than two months ago, originally with a targeted size of $30 billion. If the ANZ economists are right, this means the amount targeted to be bought by the RBNZ will have tripled, potentially by August.

In their Weekly Focus publication, the ANZ economists say they believe the RBNZ will increase the QE programme "in light of the giant government bond issuance programme unveiled at the Budget".

"We are now forecasting a further scaling-up of QE at the August MPS to a $90 billion limit. This will help to absorb the bigger-than-expected programme of Government bond issuance to fund all that spending. The RBNZ has received an indemnity from the Government to increase QE as outstanding bonds grow, so the hurdle has been lowered, but an expansion will still need sign-off from the Monetary Policy Committee. We expect this will happen at the August MPS, if not earlier," the economists say.

They say the increased QE will be in order to "keep the yield curve low and flat, in order to keep debt-servicing costs low and provide further assistance to the economic recovery". 

In the short term, the RBNZ may choose to front-load bond purchases with the current $60 billion limit, if the upward pressure on yields seen after the Budget persists, the economists say.

The central bank can also conduct purchases to assist with market functioning and soothe market concerns.

"But by August, we expect the asset purchase programme to be expanded to $90 billion. This would allow the RBNZ even greater flexibility to absorb issuance and keep the yield curve sustainably low and flat in order to support the economy."

The economists note that the RBNZ has expressed a strong willingness to do what it can, "and we think they will remain cognisant of downside risks", as they were in the Monetary Policy Statement issued last week.

"We expect the expansion to happen at the August MPS, if not earlier. 

"A Monetary Policy Statement release is a logical time to do it, alongside the release of economic forecasts, and also when the Monetary Policy Committee (MPC) is  gathered.

"However, we have no doubt that the RBNZ would not hesitate to expand the programme earlier should the economic outlook deteriorate or financial conditions tighten materially. An [Official Cash Rate] OCR Review or even inter-meeting move is possible, especially if bond markets become dysfunctional.

"Such a change in policy stance now simply requires sign off from the MPC, since the RBNZ is now indemnified by the Government to purchase up to 50% of outstanding nominal NZGBs and 30% of outstanding inflation-linked NZGBs. This cap is likely to have been considered the portion beyond which RBNZ purchases would start to distort the market."

The economists say that beyond QE, the RBNZ is keeping its options firmly open should even more stimulus be required.

"One of its options is purchasing foreign assets (presumably US Treasury bonds), which would lower the exchange rate. The exchange rate channel appears to be a favoured method for transmitting stimulus, so we expect this would be the next cab off the rank after increasing and expanding the QE programme further. Typically, the NZD plummets like a stone in times of global woe, since New Zealand as a small, open commodity exporter is seen as very exposed to the slowdown. But this time round, it’s far from clear that we are going to be worse off than anyone else, and so the exchange rate has remained quite robust." 

They note that the RBNZ also left open the possibility of taking the OCR negative, but cemented expectations that it would not be this year, with very clear forward guidance reiterating that the OCR would remain unchanged at 0.25% until at least March 2021.

"The OCR forecast stopped there, unusually, reflecting that the RBNZ wanted to leave open the option of negative rates but was not willing to commit to it at this stage. 

"We think this is wise: negative rates are a risky proposition but keeping open the threat of them will help dampen short interest rates in the meantime, maximising monetary stimulus. Market pricing has quickly factored in a small chance of cuts. There are about 15bps of cuts priced by the end of this year, and about 28bps in April 2021. We can’t rule out negative rates next year, but they are not our central expectation at this stage."