The Reserve Bank (RBNZ) is reminding financial markets it could increase its weekly bond purchases to put downward pressure on interest rates.
Furthermore, a negative Official Cash Rate (OCR) remains on the table.
Government bond yields in New Zealand and other parts of the world are rising, as financial markets are betting on an improving economic outlook lifting inflation sooner than previously expected.
NZ Government bond rates
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This is occurring as central banks around the world are continuing to deploy loose monetary policy in an attempt to lower interest rates to boost inflation.
Battling financial markets, the Reserve Bank of Australia in recent days upped the pace of its bond buying in an attempt to lower bond yields.
RBNZ Assistant Governor Christian Hawkesby told interest.co.nz the RBNZ was “watching markets really carefully.”
Asked whether ramping up bond buying for a short time via the Large-Scale Asset Purchase (LSAP) programme was something the RBNZ would do, Hawkesby said: “We’ve observed the price action, which has been pretty volatile over the last week or so.
“There have been pockets of dysfunction, I think, along the way - not just in New Zealand, but in Australia and the US as well.
“There is a lot of talk of thinly liquid conditions. So we do have that optionality; so we can scale up the size of the [LSAP] programme, if we think that would be appropriate.”
By this Hawkesby meant the RBNZ could increase its rate of bond buying within the LSAP’s $100 billion limit.
“We know that we can’t control the level of the long-term yields - they’re driven by a number of factors. But we can look at how they’re moving around relative to other comparators,” he said.
The RBNZ hasn’t upped its bond purchases in recent days. It’s continuing to buy $570 million of New Zealand Government Bonds a week - fewer than it was buying when it launched the programme last year.
Because Treasury is issuing fewer bonds than it planned to when the LSAP was launched last year, Hawkesby said the RBNZ was getting close to the cap (outlined in an indemnity provided by the Crown) restricting it from buying more than 60% of New Zealand Government Bonds on issue.
“We are getting towards 40% to 50% of some bonds on issue,” he said.
“The good thing about the current situation is, now banks have had time to get operationally ready for a negative OCR. That means that we’ve got more tools in the toolkit if we did want to provide more monetary stimulus.”
In its quarterly Monetary Policy Statement released last week, the RBNZ adjusted its unconstrained OCR projection up from its last statement released in November.
The “unconstrained” OCR measures the level of stimulus needed to meet the RBNZ’s inflation and employment objectives, considering all its tools at play. The current use of a low OCR, LSAP and Funding for Lending Programme are equivalent to the OCR being at -0.5%.
Asked how one reconciles this projected rising unconstrained OCR with the RBNZ’s dovish comments, Hawkesby stressed the central bank is still dealing with “scenarios” in an uncertain environment.
“If lending rates rise in a way that jeopardises our ability to achieve our mandate, then we need to do something about it in terms of the actions we are taking and the settings we have in place,” Hawkesby said.
Keane: RBNZ wouldn't want to 'battle the market'
Sean Keane - founder and managing director of Triple T Consulting, which advises central banks and other regulators - maintained the RBNZ wouldn’t want to “battle the market”.
He didn’t see the RBNZ suddenly increasing its weekly bond purchases just in response to higher bond yields. Instead he would expect the RBNZ to wait and observe the situation before acting.
Keane maintained that there were two things that would trigger RBNZ action - dysfunctional markets or financial conditions preventing the RBNZ from meeting its targets. In other words, a stronger dollar or higher bond yields leading to higher mortgage rates.
Keane said the market misread last week’s Monetary Policy Statement, so now the RBNZ is reminding it the economy is a long way from “normal” and still requires an enormous amount of assistance.
87 Comments
Max is explaining it for long time. https://www.rt.com/shows/keiser-report/516913-wealth-gap-cantillon-effe…
As I have seen in other threads, self-serving housing specuvestors claim that they are in favour of a "free market", very conveniently "forgetting" that in NZ we have just the opposite, with landlord subsidies, a taxation regime tilted in favour of the housing Ponzi, monetary policies that are killing price discovery and appropriate risk pricing, and a RBNZ that is actually fighting free markets with increasing desperation.
It is time that we adopted free market principles in this area, by removing subsidies and favourable tax treatment of housing speculation, immediately stop all forms of money printing, let interest rates find their free market equilibrium levels, and let the housing Ponzi deflate now before it is too late: the bigger the housing bubble, the higher the risks that it takes the real NZ economy with it, once it bursts.
General view now is that there is no link between QE / LSAP and residential house prices. The housing market boom is the result of low interest rates, market confidence in continuing low interest rates and house price growth, and high rents that incentivise buying even at daft prices. Noting of course that high rents are often subsisided by Govt who were also dumb enough to commit to continued house price growth!
Government loves subsidising rent, in fact they encourage it, with high house prices creating more tenants. To them, it’s fiscal spending (getting money into the system). The force (government+rbnz) is all about pushing newly created money into the sick patient. And when people say who’s going to pay for government debt, just ignore it. Debt is only used to justify and give meaning to a fiat currency.
I would dispute this as it's different for every jurisdiction. My understanding is the RBNZ lends money to banks at low rates. In NZ the risk weighting set by the RBNZ for bank loans is high against businesses and low against residential housing. Ergo they lend all of that loaned money into residential housing. Yes, interest rates are the main driver, but if the banks had different risk weightings, you would see them loaning more money to businesses and less money to specuvestors, sorry FHBs.
Not quite. When banks lend money they literally create it out of thin air and swap it for an 'IOU' from the borrower. This means the borrower has some cash, and the bank has an IoU (thus the balance sheet of the bank remains in balance). This is how 90% to 95% of cash enters the economy. So, banks do *not* borrow money from RBNZ to lend to borrowers. Nor do they rely on peoples' savings to make loans (a common misconception).
RBNZ do set rules on capital adequacy - the ratio between cash / assets held by the banks and total loans out (and at what risk level / LTV etc). However, banks are lending for residential mortgages because there is huge demand for mortgages from apparently credit-worthy customers. Businesses aren't demanding credit despite low interest rates, because they borrow money when they are confident in getting a return on their investment (the interest rate is almost irrelevant).
All banks have to have a current (reserve) account at RBNZ and keep enough money in that account to settle transfers between banks daily. RBNZ pays 0.25% on bank balances in this current account. When banks buy bonds from the Govt, RBNZ takes money from these reserve accounts, and gives interest-earning bank bonds in return (a swap), and when RBNZ buys bonds back from banks (aka QE or LSAP) they put cash into bank's current accounts and take the bonds back. LSAP / QE has led to banks having huge amounts of 'cash ' in their current accounts at RBNZ. You can see the impact of this in the RBNZ balance sheet: https://www.rbnz.govt.nz/statistics/r1
Great question regarding the 60% limit on bond purchases. Classic how Central Banker Hawkesby went straight to; 'the banks are ready to implement negative interest rates' lol, totally cracks-me-up.
His deadpan, yet indignant response to bond traders not taking their lead from Central Bankers was pretty comical too.
“There have been pockets of dysfunction, I think, along the way - not just in New Zealand, but in Australia and the US as well.
“There is a lot of talk of thinly liquid conditions.
Exactly: dealers in the US are hoarding US Treasury securities. Hence they are prepared to lend cash to access pristine US Treasury collateral at 0.01% at the Secured Overnight Financing Rate window.
That condition of illiquidity is reflected in the significant demand at the RBNZ bond lending facility window.
[Fed's] MR. FISHER. In summary, I want to mention that, as I said earlier, most of these variations that have been suggested are very un-Bagehot-like. And what I mean by that is, twisting [or QE] entails purchasing assets that investors are fleeing toward, not assets that they are fleeing from. Link
“The good thing about the current situation is, now banks have had time to get operationally ready for a negative OCR. That means that we’ve got more tools in the toolkit if we did want to provide more monetary stimulus.”
Investors should now go all in on real estate!
As NZ struggles to devalues its currency, there are no better vehicles to hedge against inflation than real assets.
This chart shows the effectiveness of investing in real assets (including estates) during times like these. The longer you wait the harder it'll become. Act now!
Could be a Renault?
I'm joining the call to get rid of Orr, and he can take Christian Hawkesby out for a permanent lunch when he goes.
They have the cheek to point out dysfunction. I know where the dysfunction is - between their ears if they think the economy is at risk for lack of cheap finance.
Tax Payer to Govt: GET THEM OFF MY PAYROLL NOW.
If we can vote of things like taxation and spending then voting for interest rate and inflation settings seems on the same terms/level to me. Don’t see the difference.
Globally central banks have become cult like organisations that no longer appear to represent the best interests of younger generations (and in some respects retirees).
In NZ you can vote on and discuss almost anything, as long as you don't touch the housing Ponzi.
That is out of bounds, and left to the whims of an incompetent, un-elected bureaucrat at the helm of the RBNZ, who can happily ignore the wishes of the majority of the population and even the instructions of the Minister of Finance, as he thinks he knows better.
It seriously looks like we're approaching the end of this long debt cycle. It appears we're now stuck in a very nasty liquidity trap!
John Maynard Keynes, in his 1936 General Theory,[1] wrote the following:
There is the possibility...that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto (JUMP FORWARD NOW TO 2021...)
No matter what central banks do - there are no good outcomes. Do nothing and yields rise - system breaks under debt load. Drop rates further and more debt is created which cripples the economy further.
#monetarypolicyisbroken
ps..the question becomes, who and what is going to save us from this unsustainable governance and policy setting/s?
Another answer to that question is - No one.
I know it; you know it and worst of all, they know it.
All we don't know is 'when'. That's what this is all about - buying time. But it's futility writ large.
Nothing can stop what's coming now - nothing. And it's going to be horrific.
But the clue as to 'when' might be when those we all know that are far closer to the Centre of the Universe (supposedly the Central Bankers and associated insiders) start selling - firstly their speculative art; secondly their investment real estate and finally, their hard-core stocks, shares and other assorted assets.
Everything.
Yes although capitalism is a relatively new concept for humanity if you want to look really big picture - let alone concepts like QE and inflation targeting.
Fiat currency is simply a concept that could be destroyed if the majority people decide it no longer serves their best interests - and it appears there are more and more people moving towards that space now.
Feels like western society (and it brings with it - good/bad) as we've known it is at the precipice of something very new.
Some really clever operators are starting to ask some unsettling questions.
As I suggested, 'when' is the only thing we and they don't know.
The chief investment officer of Magellan says investors face having “their shirts ripped off” by a number of risks lurking behind the rosy picture of a speedy global recovery. ....“There is no margin for error in markets at the moment…The risk is foreseeable, and there’s enough evidence to tell you it’s foreseeable and there are some clear warning signs at the moment,
https://www.investordaily.com.au/markets/48817-what-hamish-douglass-is-…
ASX falls as bond yields rise after(this afternoon's) RBA meeting
https://www.afr.com/markets/equity-markets/asx-falls-0-4pc-as-bond-yiel…
China sounds warning on asset bubbles
https://www.telegraph.co.uk/business/2021/03/02/markets-live-latest-cor…
Those with vested interests are rushing around telling everyone that interest rates can't rise. Yet history doesn't agree with that viewpoint.
If they don't rise it means we're have deflationary issues (pushing rates negative) while debt spirals out of control. Or we do have inflation and rates rise which as Magellan say will destroy financial markets (and many property investors).
I think sooner rather than later central banks will be forced to cede to reality and lift interest rates even if it means debt defaults, at least they'll still have something to work with. Private assets will shrink and so will debt, and with it money but the govt still has enough to hand out and RB can go brr again. The lesser of two evils
“We know that we can’t control the level of the long-term yields - they’re driven by a number of factors. But we can look at how they’re moving around relative to other comparators"
Errrm, maybe go and tell that to Japan who have held long-term bond yields at next to nothing for many, many years - taking down anyone daft enough to have a go at them. UK have done the same recently - with some subtle legislative reminders of their unlimited ability to finance market interventions.
The NZ strategy of showing weakness or deference to the market is plain dumb - like lying on the floor and asking to be kicked.
(Comments from Telegraph in London this morning)
The Chinese have worked out the problem and know they are on the verge of a financial crisis.
They have been making all the classic mistakes everyone has been making during globalisation.
They released the power of finance, which is the power of debt.No one realises the problems that are building up in the economy as they use an economics model that doesn’t look at debt, neoclassical economics.
As we head towards the financial crisis, the economy booms due to the money creation of bank loans, as it has before.
The financial crisis appears to come out of a clear blue sky when you use an economics that doesn’t consider debt, like neoclassical economics, as it did in the US in1929 Japan in 1991 and Globally in 2008.What’s wrong with neoclassical economics?
1) It makes you think you are creating wealth by inflating asset prices
2) Bank credit flows into inflating asset prices, debt rises faster than GDP and you eventually get a financial crisis.
3) It confuses making money with creating wealth, driving the economy into a Great Depression.
Central bonkers remind bond buyers that they have a checkbook with more zeroes on the end than anyone can imagine. Their fingers are holding the pen, ready to sign and they are staring them in the eye in an epic stare down. As bond buying happens in a currency the bonker controls, the bond buyer realises they cannot win... the bonker doesn't realise that as he wins, the country/people he is supposed to be working for, loses.
Market can be irrational, but when responding to that RBNZ being hawkish? general public started to sense of their inept, fighting the irrational with more extreme irrational measures.. slowly and surely, this subconscious picking up side, will eventually create confidence issue. They still cannot feel that yet at the moment.
If you cant see you hard earned $$ that you traded your precious time for loosing value before your eyes, then you need to pull your head out of the sand.
Opt out of their centrally controlled system where the government prints money and gives it to their rich friends, and the poor get screwed.
Buy Bitcoin, no one controls it, it is available to everyone and they can not censor your transactions or dilute your portion of the 21 million coins that you own.
https://chrisgimmer.com/bitcoin-reserve-asset/#:~:text=Portability%3A%2….
Hawkesby is living proof that there is at least one true-to-label dish on the RBNZ's "menu of available tools."
Moreover, how can any mere mortal hang her hat on the prophesying of a banker who clearly doesn't understand French cuffs? Any self-respecting acolyte of this profession wouldn't be caught dead with those little pairs of elastic balls that come with the shirt holding their cuffs together. It is a sacrilegious disgrace to the legions of financial entrepreneurs whose business it is to extract surplus value wheresoever it may be.
On the topic of cajones, if they're worried about the currency, why not just call a spade a spade and directly intervene? Surely fiat is better parked in some gold reserves rather than encouraging government largesse and property speculation at the expense of savers. Both these latter erode the link between hard work and reward which is a central pillar to a civil society. If they don't understand the ramifications of eroding this pillar, they are either willfully negligent or deliberately obtuse.
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