Reserve Bank (RBNZ) Chief Economist Yuong Ha has clarified quantitative easing might be with us for some years.
Speaking to interest.co.nz, he explained there might not be an abrupt end to the RBNZ’s bond buying when its Large-Scale Asset Purchase (LSAP) programme ends in June 2022.
If, after June 2022, the RBNZ decides it needs to keep monetary conditions stable, it could buy new bonds when the bonds it owns mature. This would see it keep its balance sheet the same size.
If the RBNZ seeks to tighten monetary conditions/increase interest rates, it could sell some of the bonds it owns or not replace matured bonds with new ones. This would shrink the size of its balance sheet.
And if the RBNZ decides it needs to loosen monetary conditions/lower interest rates, it could buy more bonds and thus increase the size of its balance sheet.
A few ifs and buts
While this is how things could work in principle, Ha said the RBNZ would also need to consider how well the bond market was functioning, and how many bonds the Government was issuing.
He explained, if the market was functioning well and The Treasury decided to issue less debt than forecast at the Budget, then the RBNZ could reduce its bond holdings to maintain the same relative share of the bond market. This wouldn’t significantly alter the degree of monetary stimulus provided.
Since the RBNZ launched its LSAP programme in March 2020, it has bought $51.7 billion of New Zealand Government Bonds and $1.7 billion of Local Government Funding Agency bonds on the secondary market. The central and local government debt it owns is an asset on its balance sheet.
The RBNZ has done the bond buying to lower interest rates to boost inflation and employment.
While the RBNZ is projecting it’ll be able to start moving away from its emergency monetary policy settings by hiking the Official Cash Rate (OCR) from mid-2022, Ha said “time will tell” what will happen with the bond buying.
He said the RBNZ would “maintain” the size of its balance sheet as at June 2022.
“Eventually, when we normalise - touch wood we get there sooner rather than later - we may look to scale back our balance sheet,” he said.
How winding back the LSAP might work with possible OCR hikes
Ha couldn’t say whether the RBNZ would start hiking the OCR before its LSAP programme and Funding for Lending Programme (FLP) are due to stop in June 2022.
In other words, he couldn’t say whether the RBNZ would seek to hike interest rates via the OCR, all the while continuing to try to put downward pressure on rates via bond buying and by providing banks with cheap funding.
Asked how wedded the RBNZ was to continuing bond buying via the LSAP until June 2022, Ha said: “The Monetary Policy Committee [last Wednesday] reaffirmed that we want to continue with the LSAP programme. We’ll get to reaffirm that every six weeks. Until that position changes, it remains in place.”
ASB economists maintain the RBNZ will stop bond buying early, ahead of hiking the OCR in May 2022.
They are among those who brought forward their projections around when the RBNZ will start tightening monetary conditions, further to interpreting its latest Monetary Policy Statement as hawkish.
Indeed, government bond yields, swap rates and the New Zealand dollar have risen since last Wednesday.
A reminder OCR hikes in 2022 aren't a sure thing; Market reaction to MPS described as 'interesting'
Asked whether this is how he expected the market to react, Ha said: “It’s an interesting reaction, isn’t it?
“If you look at the underlying message that we were portraying - it was well in line with the vast majority of expectations around our policy message…
“The new information was, we went back to publishing this OCR track that we’d gone away from for the better part of the last 12 months. So that, I guess, was news. And rightly so, markets have tried to digest what that means. We’ve tried to say, think back to the pre-COVID days when we published an OCR track. It was always a highly conditional path.”
See the video interview for more on the RBNZ's view around where inflation is expected to come from domestically without high levels of immigration, house price and tourism growth, and why the RBNZ isn't moving quicker to provide detailed analysis of the distributional impacts of loose monetary policy.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
53 Comments
Low rates do not signify stimulus nor abundant liquidity, they often describe just this sort of monetary tightness and chaos. Abundant liquidity means everyone gets funding; lack of liquidity, which does show up in low rates, means that money dealers are being prohibitively discriminating.
Low rates are not, repeat, NOT STIMULUS. They are the signal that "stimulus" doesn't work. If you have to keep doing something over and over, year after year, is that a sign of success? Nope. Bonds are kind enough to identify the cause, too. Tight money.
Low interest rates aren’t a central bank providing accommodation, they are instead its worst nightmare being shoved right back in their face. Well, our worst nightmare because for one thing despite repeated failures, rates that never rise testifying to that failure, central bankers are never held to account.
To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks. Courtesy of Alhambra Partners
Low rates are not, repeat, NOT STIMULUS
You're right. The problem as I see it is instead of targeted reforms to our outdated policies and infrastructure, the pillars of 'growth' over the last few decades have been stimuli - mass migration, LSAP, welfare increases, tax changes, bulk tourism, export education, etc.
It takes a special kind of stupid to believe a country could stimulate its economy out of child poverty and homelessness.
Low rates mean the cost of debt to consume goods and service and to start or expand your business are less = stimulatory. More spending, more investment and more jobs.
Sure boomers with crappy TD rates will be crying themselves to sleep as they eat their capital, however, that doesn't justify ignoring reality.
"The RBNZ has done the bond buying to lower interest rates to boost inflation and employment". That might be what they say out loud. But the truth is: "The RBNZ has done the bond buying to control the price / yield of bonds so that Govt can 'borrow' at negative interest rates and mortgage repayments remain affordable for the voting middle class.
Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.
Financial repression - further reading here and here
I think the more long-winded truth might be more like "I can see the tide running out on "EQ to infinity and beyond" so I am going to juice the property market so when the balloon goes up and house equity turns to ashes we can be reborn, phoenix like, with enough residual equity to not default on mass as a country"
[ Unnecessary smear removed. Don't do it. Ed ] They also probably don't want to spook the market. But I just don't believe that with that amount money being injected in to "economy" or should I say into property, we could have a "normal" economy with current unchanged monetary policy. I am gonna hold off buying property now until the picture is a bit more clear. Don't want to get burned badly.
Here's a thought that most don't think to have. I suggest this is a change to MMT type money management (creation) by stealth at Government level. But as we have previously discussed this does not come without cost, so the Government needs to create focused taxation, that not only manages the total amount of money available, but to what purpose it is applied, to ensure it's value is upheld. So would argue that has started with the taxes on housing, but in my view, no where near enough. Governments need to have an overwatch of markets to ensure they act appropriately, that they are not manipulated, and that everyone has an opportunity to participate. I hope they learn this.
We've been through this before Yvil. Markets are always being manipulated. Government's role however is to ensure a level playing field ( I acknowledge they do not always get this right) but at least they are (or should be) acting on behalf all the population. All the others who are trying to manipulate they market are doing in their own interests, at the expense of others. Governments have a role to play and they must step up to it. Hands off is not an option.
Yvil - not sure if you have ever read the Financial Markets Conduct Act....if not:
https://www.legislation.govt.nz/act/public/2013/0069/latest/whole.html#…
The main purposes of this Act are to—
(a)promote the confident and informed participation of businesses, investors, and consumers in the financial markets; and
(b)promote and facilitate the development of fair, efficient, and transparent financial markets.
Hardly interference or manipulation.
Exactly inflation is essentially a regressive tax. As poor people hold a sizable portion of their wealth in bank accounts. While the wealthy hold their wealth in real assets (often leveraged). This borrowing is inflated away in an inflationary environment at the expense of depositors.
Regressive tax? Have I missed a woke-briefing somewhere? (unlikely given the fortitude of the MSM) But yes, those with their money in cash will lose the purchasing power of that money. Not a tax of course as no tax is paid but I get the analogy.
Poor people are not suffering here as they largely by definition will not have savings to have watered down. Retirees on the other hand are going to feel this and are feeling this significantly. Those retirees with some financial acumen will have hedged into assets by now I would hope but not all can/will.
Groat
Shallow post reflecting shallow thinking.
You clearly have little understanding that actions have been those of RBNZ and that their decision making is made by a committee of far more astute people than yourself. However, due to your lack of understanding you need to personalise it to find a whipping boy.
Secondly, RBNZ has two KPI related to inflation and employment and it is meeting those targets within acceptable limits as deemed by the Governemnt to who they are accountable.
You have this extremely narrow focus and repetitive criticism of RBNZ performance and you clearly do not understand the wider implications of RBNZ actions over the past year; yes, along with significant benefits there has been costs - and house prices are just one of those costs.
Rather than trying to conduct performance appraisals on Orr, you need to keep to your limits of understanding as an Outback sparky. I strongly recommend this as a means to try and help you in getting out of your black hole and start to gain a balanced appreciation of the wider issues.
It's a worry when Outback sparkies are channelling their animal spirits and hitting targets in the dark, knowing instinctively that centrally planning monetary policy never works in the long run.
If the results of the 'astute committee members' are anything to go by, the Outback is probably the safest place to be longterm as the chickens of this historically unprecedented economic experiment home home to roost. Doesn't matter how many defenders of the status quo with skin in the game come out in defence of it. The goose is cooked.
Both, careful not to be a gatekeeper on who gets to contribute to this site.
While there is a lot of emotive drama in Groat's posts in this case he has a point. To stick to the KPI's (important but laughably too high level) is to ignore the true social costs. Life is not by the book.
Racing ahead of the Fed was one count, taking an age to introduce the LVR was the second count, announcing fanciful interest rates rises in the future has him hitting the canvas in my book. I'm with Groat on this, lets throw in the towel.
Printer8, over the last 18 months would you say that Orr has performed:
- a lot worse than could be reasonably expected
- a bit worse than could be reasonably expected
- about as well as could be reasonably expected
- a bit better than could be reasonably expected
- a lot better than could be reasonably expected
?
HH
Are you referring to Orr or RBNZ . . . after all it is decisions made by RBNZ that seem to rile those critical.
Has the RBNZ and Government done well?
Among other things:
Well the economy has done far better than expected a year ago, most businesses have survived well (and some done exceptionally well), as unemployment was initially expected to rise to 10% then 5% of all workers have kept their jobs despite that concern, home owners have seen the value of their homes increase and the cost of their mortgage fall, and there was around 3,9975 fewer Covid deaths than expected.
On the downside, FHB getting a deposit together has got a lot tougher, those withTD (especially those in their 80s and 90s) dependent on that to supplement their income, those keen on overseas travel had that curtailed, and Gvt debt increased.
So has the RBNZ and Government done well?
Depends what is important to you.
However, it would be great if those - such as Groat - could look a little wider than their exceptionally narrow / singular self-interest.
I'm referring to Orr, in his job as governor of the reserve bank and in particular his formulation and implementation of monetary policy. Of course there are other contributors to monetary policy, such as the rest of the Monetary Policy Committee, but I think it's reasonable to assume that Orr was the most significant player here. Buck's gotta stop somewhere.
I'm not asking about the performance of the government.
So, are you prepared to give Mr Orr a grade or would you rather leave it as an exercise for the reader?
HH
"Of course there are other contributors to monetary policy, such as the rest of the Monetary Policy Committee" says it all. If one watches the press conferences it is quite clear by the contribution. Interaction, and body language of others in the committee that there is consensus.
Orr is the face of the RBNZ, and it seems that a number of potential FHB on this site have been adversely affected by rising house prices, see that as the singular issue and need someone to direct their anger at.
When frustrated or angry, it is a very common (and somewhat immature) behaviour to personalise the issue and direct that anger at a person.
That is clearly happening on this site and you could be buying into it.
HH
I have answered you regarding RBNZ and Government actions - there are both positive and cost consequences of those decisions.
The issue is that you can't get your head around the fact that it is RBNZ, and not Orr personally, who have responsibility to decide and implement RBNZ actions.
Most decisions have positive and negative consequences. I was looking for your overall evaluation, however subjective it may be.
Orr has a very significant role at the RBNZ (to say the least) and should thus be given a decent amount of credit for RBNZ's successes and a decent amount of criticism for RBNZ's failures. For sure the performance of others comes into question, but the topic was Orr not his deputies or MPC co-members.
Clint Ballinger has this to say on his website.
"Government bonds for funding are well understood to be an unnecessary, vestigial custom for currency-issuers.* There has been discussion of eliminating them as they serve no funding purpose.
An argument in favor of eliminating bonds is that they are the foundation for the widely held yet false belief that a “national debt” limits what public projects can be carried out. Eliminate bonds associated with “funding” and we achieve a more transparent, easy-to-understand system with no “national debt” for the media to discuss. This in turn enables the media and public to see the logic in optimizing spending up to the public’s own desired resource use for their own wellbeing (healthcare, education, a job guarantee) and in turn electing representatives who will do so". https://clintballinger.wordpress.com/2018/11/13/decouple-spending-from-…
Warren Mosler had this to say in the Huffpost.
"I would cease all issuance of Treasury securities. Instead any deficit spending would accumulate as excess reserve balances at the Fed. No public purpose is served by the issuance of Treasury securities with a non convertible currency and floating exchange rate policy. Issuing Treasury securities only serves to support the term structure of interest rates at higher levels than would be the case. And, as longer term rates are the realm of investment, higher term rates only serve to adversely distort the price structure of all goods and services.
I would not allow the Treasury to purchase financial assets. This should be done only by the Fed as has traditionally been the case. When the Treasury buys financial assets instead of the Fed all that changes is the reaction of the President, the Congress, the economists, and the media, as they misread the Treasury purchases of financial assets as federal ‘deficit spending’ that limits other fiscal options".
https://www.huffpost.com/entry/proposals-for-the-banking_b_432105
I'm not sure that RBNZ buying paper is achieving much now for ordinary people, businesses or government. Without accompanying demand it's pushing on string.
Reserve Banks might be better off offering to buy-in to projects that help improve productivity (e.g. transport infrastructure) and circumventing government.
I mean you can't drive the real economy using monetary policy. This is a well understood principle. What you can do is steel from one group of people & give to another group of people. But this does not help the real economy which basically consists of real goods & services. The catch phrases "wealth effect" & "driving down interest rates to stimulate growth" are based on logical fallacies.
L.Randall Wray tells us this.
"The Government does not, indeed, cannot borrow its own currency in order to run a budget deficit. When government sells bonds it simply debits bank reserves and credits the purchaser with a treasury (essentially just reserves with higher interest); government does not obtain anything to use as a medium of exchange--it merely changes the form of its liability. Fiat currency typically does not enter the economy via ‘printing money’, rather, government spends by crediting bank accounts and taxes by debiting them. Excess reserves drive the overnight rate down; insufficient reserves drive it up. The purpose of bond sales by government (central bank and treasury) is to drain excess reserves; the purpose of bond purchases and retirements (by central bank and treasury, respectively) is to add reserves. Bond sales destroy reserves; they do not provide government with more currency to spend.Thus, bond sales and purchases are part of monetary policy—not a borrowing operation—they help the central bank to hit its interest rate target".http://www.levyinstitute.org/pubs/Wray_Understanding_Modern.pdf
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