The Reserve Bank (RBNZ) has affirmed its intention to use the Official Cash Rate (OCR) to adjust monetary policy, ahead of doing a lot of bond-buying/selling.
The Monetary Policy Committee said in its statement on Wednesday, “the OCR is currently the preferred tool to adjust the level of stimulus in the economy”.
It said the OCR is a more “flexible” tool, which can be “adjusted more frequently and calibrated more precisely according to the level of monetary stimulus required”, than the RBNZ’s Large-Scale Asset Purchase (LSAP) and Funding for Lending (FLP) programmes.
The Committee said the LSAP and FLP, which have been putting downward pressure on interest rates, are “geared towards providing stimulus for a sustained period of time”.
It noted that even though the RBNZ is no longer buying bonds via the LSAP, “the associated balances in the settlement cash system will continue to provide stimulus”.
In other words, stimulus is still being provided by the $55 billion that the RBNZ effectively printed to buy mostly New Zealand Government Bonds from banks and fund managers between March 2020 and July 2021.
What’s more, banks have until December 2022 at the latest to keep securing cheap funding from the RBNZ via the FLP. To date, they’ve borrowed nearly $5 billion of “newly printed money” via this programme.
Accordingly, the Committee said that when the RBNZ tightens monetary policy, “the OCR will need to be higher than otherwise to achieve a given overall level of stimulus”.
No rush to sell bonds
The Committee’s preference for using the OCR was also underlined by its acknowledgement the RBNZ doesn’t yet have an “operational strategy” for managing the $54 billion of bonds currently on its books.
The Committee directed RBNZ staff to create such a strategy.
RBNZ Governor Adrian Orr said, in a press conference, details would be unveiled in “coming months”.
But Assistant Governor Christian Hawkesby signalled the RBNZ probably wouldn’t try to tighten monetary conditions by actively selling its government bonds - anytime soon at least.
“We’re conscious that we need to communicate to the market what our intention is with our balance sheet and with those schemes,” Hawkesby said.
“The main practical decision ahead of us is the maturity of the 2023 bond, and whether we reinvest some of our current assets once those mature.
“That gives us plenty of time to outline a plan ahead of that.”
In other words, Hawkesby said the RBNZ was focussed on the extent to which it’ll buy more bonds once those it owns matures, to manage the rate at which its balance sheet shrinks/the stimulus it has provided is removed.
Asked to clarify whether the RBNZ was unlikely to start actively selling bonds before 2023, Hawkesby said, “We will outline our plan in the period ahead.
“Globally, we haven’t seen any central banks actively sell their assets back into the market. They’ve typically not reinvested maturing assets.
“For us, we need to go back to first principles and base it around; what are we trying to achieve with the stance of monetary policy?... And how can we do that in a way that’s supportive of market functioning?”
Hawkesby’s comments align with those RBNZ chief economist Yuong Ha made to interest.co.nz in June.
Ha explained how the RBNZ will need to keep managing its balance sheet for decades to come, keeping in mind the fact the longest dated bond it owns matures in 2041.
‘Significant’ economic U-turn would be required for RBNZ to loosen monetary policy
What if the Covid-19 situation worsens, and the RBNZ is faced with a situation where it needs to loosen monetary policy?
The Committee didn’t mention the possibility of doing so specifically by re-starting weekly bond purchases.
The Committee recognised: “A monetary policy response may be required if a health-related lockdown has a more enduring impact on inflation and employment.”
But a hawkish Orr said in the press conference, “We started a path to less stimulatory conditions in July by halting our LSAP programme, and that is our plan going forward.
“Very clearly, in the document, we would have to see significant different outcomes - in particular to demand - to change our mind.”
What’s more, the Committee talked up the value of fiscal policy (government spending and transfer payments), saying this has “proved to be a very effective tool to respond to any immediate reduction in demand in the event of outbreaks”.
Robertson: No need for the Government to up its debt issuance
Finance Minister Grant Robertson on Wednesday confirmed he doesn’t believe the Government needs to borrow more to cover the cost of the Wage Subsidy and other government support being offered due to this Delta outbreak.
As at July, the Government had nearly $38 billion in its bank account with the RBNZ, known as the Crown Settlement Account.
This is a very high balance, indicating the Government has been borrowing at a faster rate than it’s been spending.
49 Comments
Micheal Reddell, he of Croaking Cassandra, avers that all the LSAP has achieved is a swap of maturities, and a definite exposure to risk, with a liability in the low billions to the NZ taxpayer. It's way above my pay grade to comment further...... here's MR:
every day the Bank holds the bonds the taxpayer is exposed to unnecessary market risk (remember that they have lost us $3 billion or so to date), and there is no obvious good reason for the central bank’s balance sheet to be as bloated as it is for any longer than is strictly necessary.
And the link:https://croakingcassandra.com/2021/08/17/looking-towards-the-mps-2/
Sharon Zollner talked about this too. The $3bn has not been 'lost' - it is a liability allowance on the balance sheet (i.e. to cover a forecast loss). The financial risk has been caused by RBNZ buying bonds and placing circa $50bn into bank settlement accounts. If OCR increases, the interest payable on these settlement accounts normally increases accordingly. So a 1% increase in the OCR would mean paying an extra $0.5bn of interest on the $50bn. Now imagine that you had a $50bn 'debt' and you alone could decide the interest rate payable on that 'debt'. Would you choose to put the interest rate up so that banks with $6bn of NZ profits could get more free money?!? Nah.
I saw a twitter exchange on this and my read was that the liability was (i) interest on settlement cash + (ii) over par paid + (iii) potential loss if bond value decreases (yield increases). Surely the 'over par' bit is the weakest of those three factors given that the whole point of LSAP was to hold prices up and yields down. I would be interest in a less biased assessment of the net impact of RBNZ holding bonds - given that Govt must be saving around 3% in yield payments.
...given that Govt must be saving around 3% in yield payments.
~.3.0% is the current estimated coupon cost of the government's outstanding bond and TBill liability (~ $144,171.42 million).
Hence the RBNZ is probably not incurring a current loss from the 0.25% OCR payment on bank settlement cash balances.
The avoidance of greater public debt due to interest is simply moving it into private debt as the lower interest rates continue the exorbitant debt loading of the private sector. This will compress demand and the gap between the ability of people to debt load will forever exceed their ability to pay it back. Death's sweet release will be the only door through which debt can be escaped.
The point I tried to highlight was that the RBNZ has been using a few different tools to loosen monetary policy (lowing interest rates). So when it comes to tightening monetary policy (raising interest rates), there are a number of ways it can do this. What the RBNZ has said is that its preference is to use the OCR tool - for now at least. It has indicated it isn't going to try to reduce the stimulus it's provided to the economy by selling a bunch of the bonds it owns.
For someone with a mortgage or term deposit, who isn't particularly interested in financial markets, it won't matter so much how the RBNZ is going to eventually increase interest rates. This is what this article addresses.
The most useful thing for them to know is that before Delta came along, the RBNZ was hawkish and was very keen to increase interest rates relatively quickly. The initial story David Hargreaves did on the Monetary Policy Statement covers this off well.
Hope that helps. Sorry if I'm explaining something you already understand, or if on the contrary, the article is unclear or too confusing.
It noted that even though the RBNZ is no longer buying bonds via the LSAP, “the associated balances in the settlement cash system will continue to provide stimulus”.
In other words, stimulus is still being provided by the $55 billion that the RBNZ effectively printed to buy mostly New Zealand Government Bonds from banks and fund managers between March 2020 and July 2021.
What’s more, banks have until December 2022 at the latest to keep securing cheap funding from the RBNZ via the FLP. To date, they’ve borrowed nearly $5 billion of “newly printed money” via this programme.
Accordingly, the Committee said that when the RBNZ tightens monetary policy, “the OCR will need to be higher than otherwise to achieve a given overall level of stimulus”.
Other than the fact the RBNZ will have to pay the banks more on their QE enlarged settlement accounts at the RBNZ, only to be offset by being in receipt of the same on FLP balances, do you have any concrete examples explaining how these balances are stimulating our economy?
Japan Japan Japan Japan redux.
It was always gonna be.
It's a kind of stupidity, maybe even (whisper it) slightly racist condescension to think that we can easily escape the trap they've been struggling with for 30 years.
Rates will not rise and bond purchases will only increase. Any attempt to do otherwise will be short-lived once the market starts to gag on the purgative of price discovery.
And that is the key to this incredibly obvious situation, no connection between the money being created and those who drive the real economy. Frankly I am sick of hearing about QE in all its hideousness, this type of mutual masturbation in economic ivory towers should be kept out of the public eye.
Interest Rate Fallacy:
Low Yields = TIGHT money
Bank Reserves don't matter,
QE not money printing
I am reinforcing your comment, but it must be noted:
The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.
Link page 2 of 14 PDF
This notice may have been updated without my knowledge.
Not quite. The Japanese banks have much more cash in their central bank settlement accounts than they need to honour inter-bank payments (so do NZ banks). However, banks do *not* lend out this money and it makes no material difference to their decision to lend. The problem in Japan (and NZ) is not supply of credit, it is enough businesses wanting to access credit to do anything vaguely productive, on that we agree.
You just confirmed what I said. But your point about doing anything "vaguely productive" is completely wrong. Much of Japanese bank lending goes into industrial production and innovation. That is a reason why they're a net creditor to the world. Japanese bank debt is not being used to speculate on house prices. There's a difference.
Japanese bank debt is not being used to speculate on house prices. There's a difference.
Unlike this lot: Ireland Home of the renters
I am amazed that these people are making important decisions. Let's take two of those statements:
'the associated balances in the settlement cash system will continue to provide stimulus'... this is literally nonsense. Banks do NOT lend out the money in the settlement cash system - and there is zero evidence that banks excess reserves is in any way stimulatory. All that the excess reserves do is remove the need for an overnight lending market between banks (and from RBNZ to banks when they are desperate). Worth watching a tutorial from Stephen Hail on this (he used to train bankers) https://www.youtube.com/watch?v=rREOylUf4Wo
'It said the OCR is a more “flexible” tool, which can be “adjusted more frequently and calibrated more precisely according to the level of monetary stimulus required”'... This is even worse. On what planet would anyone claim that fine-tuning the OCR has any impact on the real economy, employment etc? This blind faith in disproven monetarist theories (e.g. that businesses propensity to invest is higher when interest rates are low) is madness. The remarkable economic rebound we have seen in NZ has been the direct result of significant Govt fiscal stimulus - paying wages etc. The OCR has been borderline irrelevant - other than as a contributory factor to the housing boom.
Ha! One thing that the MMT folk get right, and most economists and economic commentators get wrong, is how the banking system actually works. It is frustrating hearing supposedly well-informed journalists talking about how banks have got loads of money to lend out, or that QE is printing money to fuel the housing boom, or that Govt somehow needs to run scared of the bond vigilantes etc.
One thing that the MMT folk get right, and most economists and economic commentators get wrong, is how the banking system actually works
Sorry my friend but this is so boring. You are correct, but if that is all the MMTers can bring to the table time and time again, what is the point?
I can't speak for 'MMTers' - but I have read enough to know that the key MMT scholars (and Keynes!) have a lot more to contribute to 21st century economics than a 'descriptive model'. For example, the alternatives proposed to the neoclassical prescription of using a buffer stock of unemployed people (NAIRU) to combat inflation, and the recognition (as per Keynes) that inflation is actually rarely a 'monetary phenomenon' and would be better tackled through better fiscal planning (see US approach to financing the second world war). I worked my way through most of this reading... https://deficitowls.wixsite.com/mmt4mainstreamecons
OCR is a dud bullet in NZ as events have proved during the last 10 or so years. Time to ditch it, at least for controlling house prices. As for inflation, that tiger is sleeping soundly, with some signs of coming awake for a meal. It is not prowling and is not yet a threat. With Covid raging and economies down all over the world, Inflation is something that can be put on the back burner for another 3 years or so.
What is left for RBNZ ? Stimulating the economy when required and keeping the job rate at a happy level.
Central Banks have to reassess their role and re draw their job descriptions. Now is a good time to do it.
Instead of following the Fed blindly. Let us realise NZ is different and make policies to suit us.
Nope the OCR is perfectly fine, its just the RBNZ are to chicken to pull the trigger. The choice was simple increase the OCR or watch the price of houses continue to run away. All the RBNZ are hoping for is that everyone finally runs out of money and house prices stop increasing, which logically simply has to happen at some point but they are dreaming at this stage, the market still has legs.
Yes we have plenty of serviceability runway left at 1.99% interest rates on mortgages and that will keep driving prices. Of course the market will turn at some stage and I really feel for those FHBs who are left in negative equity, not for them the bach, the overseas travel, the new car. No, their reward will be depression, probable divorce and poor health outcomes on the back of that.
Economists see themselves as without blame, and amusingly as "scientists" but as social engineers they are almost as much to blame as their academic masters and the media.
Yup.
Closest I've been to history I think is being on the SS Canberra in June 1967 as it sailed toward the Suez canal. If it had been a couple of hours faster the 6 Day War would have exploded around us. Ship got a call from London, turned around and went down to the Cape instead. Just missed out.
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