The Reserve Bank (RBNZ) has conceded that its monetary policy was "too stimulatory" at some stage during the response to the pandemic. But it appears to be laying the blame for its inability at the time to take the Official Cash Rate (OCR) into the negatives.
The rare admission of fault by the central bank comes in a background paper that outlines why the RBNZ went down the quantitative easing (QE) path, deploying the Large Scale Asset Purchases (LSAP) and Funding for Lending Programme (FLP) as part of its monetary policy response to Covid-19. The paper also outlines a framework for assessing the impacts of these programmes.
The LSAP programme saw the RBNZ buy about $53 billion of government bonds - which are now being sold back to Treasury at a rate of $5 billion per year - while the FLP, which allows banks to borrow at the Official Cash Rate, has so far been utilised to tune of $12.7 billion. The FLP officially ends in December.
The RBNZ effectively indicates it had to go down the path of QE due to the unpreparedness of the banking system for a negative OCR. It appears to imply that a negative OCR would be the preferred path in future.
"The OCR remains the most effective tool for managing the overall level of monetary stimulus through economic cycles. The banking system is now in a position to accommodate negative interest rates, and this will form part of the monetary policy toolkit in future," the RBNZ said.
The background paper notes that consumer price inflation is above the RBNZ’s target range.
"Estimates of core inflation, which measure the persistent component of inflation, range between 4% and 6% per annum, well outside of the 1%-3% inflation target range.
"With the benefit of hindsight, this indicates that monetary policy was too stimulatory at some stage during the tumultuous economic period of the pandemic. In response, the OCR is now above its neutral rate until domestic demand better matches the supply capacity of the New Zealand economy."
The RBNZ hiked the OCR by another 50 basis points on Wednesday this week to a seven-year high of 3%. The cash rate has been hiked by 225 basis points this year with probably at least another 75 to come before the end of this year.
In the background paper, the central bank said the "pattern" in monetary policy settings it had followed was "a global phenomenon" and had occurred in many other countries around the world since the onset of the pandemic.
"There will be important lessons in this for the RBNZ – captured in our forthcoming review – and for domestic and international policymakers more generally."
The RBNZ is currently undertaking a detailed assessment of its monetary policy actions over the past five years, as required by the Reserve Bank Act (2021). The bank says that to ensure this assessment is fair and transparent, it will be externally peer reviewed by two international experts on monetary policy.
"The RBNZ aims to learn as much as possible from this review, which will provide a balanced assessment of the net benefits of RBNZ’s monetary policy actions over the past five years. The RBNZ will publish this work towards the end of 2022."
The background paper notes that "importantly", during the period of "extreme economic uncertainty" in 2020, the RBNZ's Monetary Policy Committee – which sets monetary policy at the RBNZ – "clearly communicated that there could be some ‘policy regret’ in future, given the circumstances".
"Managing future high inflation down, rather than dealing with deflation and economic depression, was considered to be the ‘least bad’ regret, if one was forced to choose.
"We are now well advanced in tightening monetary policy to manage inflation down into the RBNZ’s target range, having avoided economic depression, deflation, and unnecessary high unemployment."
The RBNZ said the net benefits of it deploying its monetary policy tools also need to account for the risks associated with the policy action relative to the case of no action. "While difficult to quantify, Table 5 offers a brief assessment of the risks associated with the deployment of the LSAP and FLP."
The RBNZ said that exploratory work done in 2019 had found that many of New Zealand’s commercial banks "were not operationally ready" to manage negative interest rates, should they be required.
"This raised serious concerns about any unintended impacts of a negative OCR on the efficient functioning of the New Zealand financial system. With the OCR near its effective lower bound (near zero), the RBNZ began developing additional monetary policy tools. The RBNZ also instructed commercial banks to prepare themselves for a negative OCR, should that be required in future.
"With further cuts to the OCR constrained, ‘quantitative’ tools – such as the ‘Large Scale Asset Purchase Programme’ – became increasingly necessary as options for implementing monetary policy.
"By early 2020, with the global onset of the COVID-19 pandemic, the need to deploy additional monetary policy tools became increasingly apparent. With the OCR at its practical limit, additional ways of providing monetary stimulus were required if the RBNZ was to achieve its monetary policy and financial stability goals."
The RBNZ said its modelling shows that while OCR cuts "were clearly critical", the LSAP and (less so) FLP were "also key" in lowering interest rates and loosening overall monetary conditions.
"By using LSAP and FLP, the RBNZ was able to provide additional monetary support and financial market stability to New Zealanders, even when the OCR couldn’t be lowered due to operational constraints in the financial sector."
While it is "extremely difficult" to isolate the individual economic impacts of LSAP and FLP, lower interest rates brought about by accommodative monetary policy were fundamental in supporting economic activity over the pandemic, the RBNZ says.
"RBNZ actions led to higher than otherwise aggregate spending, investment, employment, profits, and tax revenue in the economy. Lower interest rates along the yield curve also put downward pressure on the exchange rate, contributing to improved net export revenues. Unemployment, business failures, welfare expenditure and long-term economic scarring were all lower than they otherwise would have been.
"In addition, the return of liquidity and stability in the government bond market promoted broader financial stability, enabling ‘business as usual’ activity for government and firm capital raising and financial intermediation. All this was achieved despite the continued extreme economic uncertainty associated with an unprecedented global pandemic."
65 Comments
I'll repeat what i've said the whole time, which is that interest rate based stimulus was simply a nonsensical response to the population being locked inside. I would wager it had no effect on employment, and the benefit went entirely to asset prices. They still seem reluctant to admit this.
"Everyone else was doing it" is also not an excuse.
When they dropped the OCR I believe they dropped furthe, faster than other countries. Thus boosting inflation and asset prices more than needed
Now that. other countries are going up further and faster.. rbnzare dragging their heels. again boosting inflation more than needed and we are taking longer to reduce asset prices... (and i would expect prolonging and making more serious any future correction as we havent acted to stop wage rises, mortgage rates and spending fast enough - the market still thinks everything will be ok and have already priced in a couple more small rises, with no real impact).
Its like RBNZ insists they know best - regardless that outcomes prove they dont
OldSkool, you are right when you say the RNBZ dropped rates further and faster than other countries - a huge blunder.
You are not right when you say that now they are dragging their heels on the way up. Our OCR is far higher than that of other countries, especially of the EU and the US. This is astounding, when our property market is falling much faster than that of the EU or the US, and our economy is much property-dependent than that of industrial nations.
In summary, our RBNZ tends to oversteer heavily, both on the way down and now on the way up. Not good, leading to economic havoc.
Mrkus 'our market is far more property dependant' - is the problem. The property market desperately needs to ( and will correct) of its own accord. the longer we try to force it to go up or keep it higher than it should be, then the more structural long term issues with our economy. And eventually it will correct and be a much harder and deeper landing.
We need inflation to go down so people can afford to live and eat, we need affordable housing, we need other investment types to be more attractive than property (productive businesses). We need more young professionals to move here and stay here (doctors, teachers, engineers)... so our health system works, so we have decent education and a future economy, we need to attract high skilled immigrants, we need to takje action on climate change, we need crime to fall, we need social cohesion ->all of which require falling inflation and lower house prices and less focus on property. We can only swim against the river so long.. the further into the current we swim the harder it will be to get back when the current sweeps us
Market Interest, you nailed it. The mistakes of the past (finally admitted, which is great) cannot be changed.
Yet, they are following the herd once again (i.e. the FED), by aggressively rising interest rates when the property market is tanking! What are they thinking??
They need to stop rate hikes, better yet - resign. Bring in a new RBNZ governor and a new NZ government. (I know, I am dreaming.)
the property market needs to correct
if you draw it out it just makes a longer process and a more entrenched mess.
Short and sharp and hopefully some of the carnage is avoided.
Already inflation has wiped out a fair amount of wealth and savings across the board.
A few overleveraged will struggle and there will be an effect on business and the economy, but I MUST reiterate, the boom of the last 2 years was artificial and was always going to recede, one way or the other.. Stagflation would cause exactly the same result, just appears in a different form.
One political party relishes the idea that more of the population will be reliant on social welfare - entrenching their grip on power and control of the people.
Destabilising the economy is just one tool in their ideological tool chest.
Some could argue this is all going to plan and not an over correction through pure negligence.
The RBNZ doesn't appear very independent to me.
“But it appears to be laying the blame for its inability at the time to take the Official Cash Rate (OCR) into the negatives”
This smells like bullshit. Given that Geoff Bascand sent a letter to the banks 7/5/20 containing the following, I’d say heads need to roll within the RBNZ compliance and regulatory function.
It’s worth noting the date in the first para which strongly indicates neg OCR thinking is well developed as a potential lever pre COVID response:
"Based on responses to the Supervision Department’s letter of 29 January 2020 we are pleased to hear that many banks are already undertaking their own contingency planning to assess whether their systems and processes can handle negative interest rates, and addressing contractual and conduct risk issues….
…The purpose of this letter is to outline that negative interest rate functionality in the New Zealand banking system remains a priority from an operational and risk management perspective…
…We would ask you to engage with the Reserve Bank on the implementation issues you identify, to ensure you can factor in the Reserve Bank’s position when you provide an initial status report and remediation plan. We expect to receive those by 30 June 2020. The remediation plan should outline how you propose to remediate all identified issues by 1 December 2020.”
Cap-doffing regulation at its finest.
Prefer here PDK’s favoured bollocks! This is nothing but self serving self appeasement justification of a response as witless as it was unnecessary. The OCR pre covid, was already wound down to as far as it could be and whatever stimulus that provided had already been well & truly spent. Crashing it then below that, supposedly to protect the housing market, did absolutely nothing as those who could borrow soundly had already done so. What did happen though was a drastic switch into housing for investment income which caused prices to simply get strapped to a rocket. The guts of the policy was to encourage NZrs to borrow to spend to stimulate the economy. That was nuts and taking the OCR into negative would have just added baloney sauce as a topping.
Foxglove, I don't think the RBNZ was ever out to protect the housing market. This is evident by their actions now, which are crashing the housing market. If they are not completely ignorant (which they may or may not be) and if they are actually watching the housing market (which they may or may not do), then something more sinister must be at play:
A conspiracy to drive the housing market to ridiculous heights whilst loading people up with debt, only to then crash the same housing market and trapping the debtors - perhaps with the goal to ruin the economy so even more state control can be introduced. This, of course, is a conspiracy theory - something despicable and far-fetched.
No, not despicable though perhaps if you were a FHB in the last 2 1/2 years you may have a different view. I would say a combination of hubris from Orr/Hawkseby, a lack of financial markets expertise in key roles and a culture of compliance were the factors you are looking for.
There was a saying around the financial market traps, Bollard’s stewardship prior to the 2008 GFC, that the RB invariably turned up at the party too late, did too much and stayed too long. This time I would agree, as someone suggested here a while back, they turned off the lights as well. Yes I did say supposedly protect the housing market, but from what I have read here and elsewhere there was little else of actual substance to support the policy, other than your valid point about incentivising folk to get themselves into debt.
heads should roll why? Because this letter shoudl have been sent 2 years early so they were ready in time for covid? Or because they gave the banks 12 months to support negative rates?
Presumably the banks responses by 30 June, were that it would not be possible to support negative rates by 1 Dec 2020.
Because
(a) they’re telling porkies that neg OCR is implicitly linked to COVID response when the dates don’t stack up, and
(b) they gave the banks plenty of time to land the operational solution, but then clearly accepted their nonsense that it was all too hard - not dissimilar from the BS11 excuse making that’s been prevalent.
So they are now massaging the narrative for when the review is undertaken - and to therefore get the right review outcome - we did all we could and it was all the best course of action - blah blah blah they could just hire Greta
Orr and RB generally still dont accept that core inflation in NZ has been above target for years - covered up by imported deflation. As a result they have taken the wrong policy actions now compounding the problem
hey - but the values of their investment properties rose, and havent dropped too far. They earn tons so dont worry about inflation or exchange rates too much and their mates at the banks might be happy with the situation so likely great career prospects for after all this.
Wait did someone say people are struggling to eat somewhere in nz.. let them eat cake
What has not been addressed is how the RBNZ went about its QE/LSAP
RBNZ simply charged in and bought large quantities of bonds right across the yield curve, In contrast the Reserve Bank of Australia started off with yield curve control, aimed at holding the yield on govt bonds out to three-year maturities at 0.1%. Just the announcement of the intention to do this saw the market yield drop to that level without the RBA having to purchase many bonds itself. Later they expanded their purchases to longer dated bonds, but overall their policy was better thought out than the RBNZ's gung-ho approach.........
"We are now well advanced in tightening monetary policy to manage inflation down into the RBNZ’s target range, having avoided economic depression, deflation, and unnecessary high unemployment."
Where's that Simpsons meme.....
"having avoided economic depression, deflation, and unnecessary high unemployment "so far......" "
Pure nonsense from RBNZ. LSAP had a brief positive impact - propping up the price of bonds and thus holding yields down. However, having done this for a few weeks, the mere threat of intervening at a given floor price would have been enough to control yields over the medium-term. And, yet, they carried on regardless, and took other measures (LTV), which put a rocket under asset prices.
It is also crystal clear that it was direct fiscal stimulus that actually saved the economy. But RBNZ won't say this too much as it highlights that monetary policy is basically useless.
“It is also crystal clear that it was direct fiscal stimulus that actually saved the economy.”
And there’s the rub.
Rather than hosing the banks and business with hot cash, why wasn’t more effort made to put helicopter money directly into peoples hands (something simple like tax free thresholds), when theres incontrovertible evidence that direct stimulus works, and almost instantly from an economic perspective?
To be fair, RBNZ buying bonds in the secondary market (LSAP / QE) added nothing to Crown debt at the time. The bonds have lost some value since - but these losses have been more than offset by increases in the value of other financial assets.
Bernard often talks about QE as if it was the Govt spending or 'printing money'. He knows better I'm sure. When the Crown buys bonds - it is basically a 'refund'. They are giving back the money they received when they sold the bond in the first place.
I didn’t necessarily need to load the balance sheets though, I would have thought?
The same off balance chicanery might have been applied by say, accepting the need for extraordinary fiscal stimulus via tax cuts but explicitly funding it via a bonds round in the secondary market. The whole fiscal cap is nonsense anyway in a crisis - a totally self imposed constraint, inconsistent with reality. It’s politics over substance.
Yes, Robertson would have been hammered as a hypocrite (I believe this was an accusation levelled at English’s tax cuts, that it was basically paid for by Crown debt) but in the circumstances, it could have been justified.
Once the stimulus worked, it could have been hoovered back up again with a one-off tax take. I would have thought with a little imagination, this could have been well signalled and received bi-partisan support.
But that wouldn't have landed the banks record profits.
It might have saved those who did further leverage themselves via the banks to not have such a bleak outlook now too.
The idea of mortgage holidays for lending at the OCR was just downright smart on the banks part. Short term stability at a long term price
This latest statement by Orr is just a pathetic ass-covering exercise that does not even begin to make any economic sense. I do not know if blaming their epic monetary policy stuff-up to the fact that they could not implement a negative OCR is disingenuous or just utterly stupid. In any case, it is really time for Orr to go - he has done enough damage already, and this statement is just another proof that he is still not getting it.
I’ve said this a few times lowering the OCR was probably the right thing to do - keeping it low after asset prices skyrocketed was the wrong thing to do.
once it was obvious we had a V shape recovery the OCR should have been returned to pre-covid levels - in other words in Oct/Nov 2020 and at the latest Feb 2021- instead it took a further 12 months to raise interest rates resulting in an overcooked asset market and higher interest rates overall.
3% WON'T CUT IT
- The Funding for Lending Program is still operating
- 300+ million for a media merger
- An unaffordable housing market
- A failing/failed education system
- Mass government 'MONEY PRINTING'
Current NZD/USD = $0.6275
3% WON'T CUT IT
I don't believe for a second the RBNZ or the government are taking inflation seriously enough.
I try to stay in the realm of financial fact.. though:
IMO I think they are being piecemeal at best and willfully blind at worse.
Why? Because sucking money out of the financial system via meaningful rate hikes would cause huge pain to leveraged asset holders and disappointment to freehold homeowners. The result of continuing to follow the path-of-least-resistance is of course the ingrained impoverishment of those starting out in life and non-asset holders.
It's a recipe which produces a lack of social mobility and a concentration of assets into the hands of a few, as less and less people have access to capital/credit to acquire assets.
Taken to its logical conclusion such a system/country fails due to the lack of incentives for the general populace to work and/or be ambitious. Many asset holders then start to fund their lifestyles via rent seeking and government largesse. At that point the poor are used as funnels to prop up asset prices via subsidies.
Then inflation really kicks off and the currency of such a nation takes a huge hit, lawlessness become rampant. Running a nation into the ground in such a way probably produces slave labor.
One of the challenges right now is that almost all of the LSAP and FLP money is still out in the market. And until the majority of that is hauled in then holding inflation in control will be very challenging. The OCR can be used to reduce inflation by reducing economic activity, but as long as the QE money is out in the market then conditions will be ripe for a renewed inflationary burst. There is a lot of work still to be done.
KeithW
I have raised this before, it's my opinion at 3% OCR they should now embark on QT and leave the OCR here. This would provide some relief to low earners yet continue to unwind stimulus. However this crystalises the LSAP loss rather than accruing it and would also drive up the Crowns term cost of funds. So yeah, better to let struggling Kiwi's suffer.
I would respectfully disagree on two fronts:
1. The QE / LSAP funding 'left in the market' is not stimulatory - secondary bond holders got a refund (plus a bit extra) on their bonds, and the settlement accounts that commercial banks have at RBNZ were credited with billions (they remain heavily inflated at around $45bn). The extra liquidity has long since been absorbed - invested in other financial assets mostly. Those excess bank reserves and the FLP funding is not driving borrowing, which depends on consumer / business appetite for credit (banks are comfortably within their risk ratios and don't need any liquidity / capital to support lending)
2. In domestic sectors where inflation could potentially be pinned on excess domestic demand and fiscal stimulus (e.g. construction, consumables), demand is retreating fast as lower / medium income households are feeling the pinch of higher mortgage rates and high prices. The Govt fiscal stimulus ($40bn to $50bn) that kept the economy running during 2020 and 2021 (and increased demand for some things) during Covid is now sat safely in savings accounts and corporate coffers. Taxing these excess savings out of the economy would be sensible.
Stabilise NZD, raise rates until inflation is falling back close to 3%. Then cut taxes stop gst on food and gas this will keep economy moving, house prices need to crash, 10 x average wage couple income is not affordable for 3 bedroom house in rundown area of Auckland
Aug 2019. Orr cuts the OCR by 0.5%. Six months before covid. He had already played his cards poorly before the real crisis (???) began. He's a socialist. He just wanted to prove MMT right. He was wrong. They were all wrong. Especially the politicians believing their own media which they already know is bullshit. The whole shebang has been insidious theatre.
Fire the lot of them. I'll bring the lighter.
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