The Reserve Bank (RBNZ) has left the Official Cash Rate and the quantitative easing (QE) programme unchanged at its latest review but says significant economic challenges remain.
It could be inferred from the bank's latest statement that it may well (as the market expects) increase the size of its Large Scale Asset Purchase (LSAP) programme - basically QE, or money printing - when it has its next review in August.
The RBNZ said it was prepared to provide additional stimulus as necessary.
RBNZ Governor Adrian Orr noted that domestic economic activity had been resumed earlier than the bank had assumed its May Monetary Policy Statement and the Government’s intended fiscal stimulus, announced in the May Budget, was also slightly larger than assumed.
"These outcomes give cause for some confidence but significant economic challenges remain."
Orr said as well as potentially expanding the LSAP programme, the [RBNZ Monetary Policy] Committee continues to prepare for the use of additional monetary policy tools as needed.
"The Committee’s decisions are guided by the Reserve Bank’s mandate and its decision making principles on the use of alternative monetary policy instruments. We will outline the outlook for the LSAP programme and our readiness to deploy alternative monetary policy tools in our August Statement. We are committed to meeting our inflation and employment mandate."
At the moment the LSAP is set at $60 billion of purchases - with around $17 billion due to have been completed already by the end of this week.
The OCR is at 0.25% and the RBNZ has pledged to keep it at that level till next March (12 months from when it was cut).
However, the RBNZ has continued to keep the door open to the prospect of negative interest rates (while stressing that retail customers would not actually face negative rates) and this was reiterated again in Wednesday's record of the latest RBNZ Monetary Policy Committee meeting.
"Members noted that staff are working towards ensuring a broader range of monetary policy tools would be deployable in coming months, including a term lending facility, reductions in the OCR, and foreign asset purchases, as well as reassessing the appropriate quantum of the current LSAP," the statement said.
The RBNZ, as expected, expressed dissatisfaction with the recent rise in value of the Kiwi dollar. Its comments saw the dollar fall slightly against the American currency from about US65.1c before the announcement to US64.85c after.
This is the statement from RBNZ Governor Adrian Orr:
Tēnā koutou katoa, welcome all.
The Monetary Policy Committee agreed to continue with the Large Scale Asset Purchase (LSAP) programme aimed at keeping interest rates low for the foreseeable future. The LSAP quantum remains set at $60 billion. The assets included are New Zealand Government Bonds, Local Government Funding Agency Bonds, and NZ Government Inflation-Indexed Bonds. The Committee is committed to reviewing this quantum at regular intervals, with a focus on achieving its remit. The Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March.
New Zealand has contained the spread of COVID-19 locally for now, enabling a relaxation of social restrictions and an earlier resumption of domestic economic activity than assumed in our May Monetary Policy Statement. The Government’s intended fiscal stimulus, announced in its May Budget, was also slightly larger than we assumed. These outcomes give cause for some confidence but significant economic challenges remain.
The severe global economic disruption caused by the COVID-19 pandemic is persisting, leading to lower economic activity, employment, and inflation abroad and in New Zealand. The negative economic impact on New Zealand is exacerbated by the required international border restrictions, as the vast majority of the world battles to contain the pandemic. The appreciation of New Zealand’s exchange rate has placed further pressure on export earnings.
The main support for the economy in this environment is appropriately being provided through increased fiscal spending. However, monetary policy will continue to provide significant support.
As outlined in our May Statement, the balance of economic risks remains to the downside. The LSAP programme aims to continue to reduce the cost of borrowing. Retail interest rates have declined with lower wholesale borrowing costs. It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme.
The Monetary Policy Committee is prepared to provide additional stimulus as necessary. As well as potentially expanding the LSAP programme, the Committee continues to prepare for the use of additional monetary policy tools as needed.
The Committee’s decisions are guided by the Reserve Bank’s mandate and its decision making principles on the use of alternative monetary policy instruments. We will outline the outlook for the LSAP programme and our readiness to deploy alternative monetary policy tools in our August Statement. We are committed to meeting our inflation and employment mandate.
Meitaki, thanks.
And this is the record of the MPC meeting:
The Monetary Policy Committee agreed that global economic activity has been severely affected by the COVID-19 pandemic. Measures to mitigate the pandemic have resulted in a global economic downturn and severe disruption to international trade.
The global restrictions introduced to mitigate the spread of the virus have provoked a severe downturn in New Zealand as well. The full set of evidence is not yet available to determine how the pandemic is affecting the economy, but the Committee agreed that the June quarter data will show a substantial decline in economic activity. The economic risks remain to the downside despite some high-frequency data suggesting that demand has increased since the end of Alert Level 2 restrictions.
The Committee agreed that the extent of the continued job losses and reduced activity remains uncertain. It noted that much will depend on how willing households and businesses are to spend or invest in the current uncertain environment. Members noted that household and business confidence remain weak.
The Committee discussed the importance of fiscal and monetary policy support in lifting economic activity and employment. Members noted that announced fiscal policy measures are expected to support economic activity. The extent of recovery will depend in part on the impact of these policy measures and the speed with which they are implemented.
Members discussed the improvements in the outlook since the May Monetary Policy Statement. It was noted the move to Alert Level 1 arrived sooner than assumed in the Statement, bringing an earlier lift in retail spending and general activity. The Government’s fiscal spending intentions outlined in its May Budget were also larger than assumed, implying more spending support than estimated in the Statement.
The Committee acknowledged that some trading-partner economies have begun to relax their restrictions on business activity, providing some confidence on the outlook for New Zealand’s export demand.
However, members noted that these positives could be short-lived given the fragile nature of the global pandemic containment. The Committee agreed that current disruptions to supply chains and international travel – including tourism – will persist and constrain growth and employment. Members also noted that the exchange rate has appreciated since the May Statement, dampening the outlook for inflation and reducing returns for New Zealand exports.
The Committee discussed the effectiveness of the Large Scale Asset Purchase (LSAP) programme so far. Members noted that financial markets are functioning well and that the NZ government bond yield curve has flattened. The Committee noted that mortgage rates have declined since the May Statement, reducing the cost of borrowing for households and businesses. Members noted that these mortgage rate declines have been accompanied by similar declines in deposit rates.
However, the Committee agreed that it is not yet clear whether the monetary stimulus delivered to date is sufficient to meet its mandate.
Members discussed risks to the economic outlook. It was noted that risks remain skewed to the downside as outlined in the May Statement, despite the marginally stronger starting point for the New Zealand economy.
Due to worldwide uncertainty about the pandemic containment, the possible negative outcomes remain severe and larger than any near-term upside surprises. Added to these concerns was the challenge of phasing out various Government support schemes – in particular the wage subsidy – which could lead to further job losses. The Committee agreed that the labour market is severely disrupted, with data on wages, hours worked, participation, and utilisation all important for assessing aggregate demand and supply capacity.
The Committee noted that any potential easing in international border restrictions could provide a boost to the New Zealand tourism and education sectors, however it acknowledged this is highly dependent on the virus remained sufficiently contained in other parts of the world.
The Committee discussed the secondary objectives of monetary policy. Members noted that financial stability is being supported by the ongoing monetary stimulus. A prolonged downturn could undermine financial stability, so it is important that there is sufficient monetary stimulus to achieve the goals of monetary policy. The Committee noted that Reserve Bank staff will provide a more detailed briefing on financial stability for the August monetary policy decision.
The Committee discussed the range of available policy tools. It was noted that the existing LSAP programme is continuing to ease monetary conditions.
Members discussed the pros and cons of expanding the LSAP programme now. Members noted that any expansion would need to be driven by the economic outlook and assessment of the effectiveness of the programme. A change in the size of the programme would also need to be of sufficient magnitude to make a meaningful difference.
Members noted that staff are working towards ensuring a broader range of monetary policy tools would be deployable in coming months, including a term lending facility, reductions in the OCR, and foreign asset purchases, as well as reassessing the appropriate quantum of the current LSAP.
The Committee reached a consensus to continue monetary easing through the existing LSAP programme and to keep the OCR at 0.25 percent.
94 Comments
I know what you mean. If only the RBNZ cared about where the lending is happening... Is the money going to productive businesses or landlords? In a risky environment like this, commercial banks will be very reluctant to lend to businesses that have big plans, employ staff, produce something valuable, but temporarily struggle with cashflow due to Covid.
On the other hand, parasitic "businesses" with a steady cashflow (rent) and lots of assets (rental properties) will have no problem getting some cash to expand their portfolios.
I understand your frustration that all that has happened in NZ over the past 20 years is house prices sky rocketing and house owners using their properties as a leverage to buy more houses and make life difficult for first home buyers. But please stop spreading this baseless fantasy that the reason nz economy (other than housing sector) stalled is lending to properties thus not directing money to those.
It is the exact opposite, lack of real economic opportunities (because whatever NZ is good at is already so heavily invested in or is almost fully utilized that further investment is not warranted (primary industries) or that the return prospect is very risky (e.g. software and IT, you know for 1 successful software how many bankrupted ones are developed? this is a very high risk high reward area where bank lending will never go to until they are mature and established).
The money flows to where there is a return, if in NZ it flows to housing market is due to lack of other avenues. You can shut the tap (i.e. ban any lending to properties, ban investing in properties, increasing LRV or introducing DTI etc), but do not think that shutting the tap does not have its own very serious consequences. You cannot fix a whole lot of fundamental failures (e.g. failure in NZ education system to enable capable workforce to provide a foundation for entering into other economic fields) by being angry at the RBNZ.
So in that case, who exactly is RBNZ helping now with QE and putting LVR restrictions on hold? There are even less opportunities right now than 6 months ago, so where is that money gonna flow?
Money will stay in property as long as "investors" perceive it as a zero risk cash cow. And RBNZ's actions seem to indicate that they want to shift the risk to the taxpayer. So how does that help, again?
By money I assume you mean lending by private banks to house investors. Do you have any evidence that it is happening? The RBNZ information for may should come out soon, but in the April 2020 info shows a very sharp reduction in lending. So the current impact of removing LVR has not been a crazy flow of money (from bank created credit that is) to property.
QE is another story, the QE is printed money to help government to effectively pay wages of people who lost their jobs. But the government spending ultimately pumps up asset prices as a lot of goods and services people buy are privately owned (rents paid to landlords). The QE is a government initiative and is not under the control of the RBNZ. How they spend the money and its impact are more directly controlled by the government. For example, they could have elected not to support lost wages and spend the money in a different way. That might have completed crashed the house prices, and government would have been the only buyer willing and able to buy distressed properties. That was and is up to the government (who is the one who actually spend the money) and not the RBNZ. the RBNZ has just agreed to support the government initiative to create more government debt.
The RBNZ is the whipping boy for many in this website, where it really is the government and their policies that has a much greater impact.
bw, why are you always so upset about RB's providing stimulus, surely you must know it's coming. I'm not arguing if the stimulus is right or wrong but surely, at some stage you have to deal with "what is" rather than what you think "should be".
The RBNZ is not providing "stimulus". They're providing liquidity. If you think there is going to be some kind of "melt-up boom", fair enough as it's the kind of rhetoric boucing around and most likely trumpeted through the fluffy lite of media like Granny Herald. However, important to remember that you're in unchartered waters. Middle NZ is not stacked with investing / financial geniuses just because we've had an epic property bubble. In fact, it's quite possible that things backfire rapidly in the near future.
Of course the RBNZ is providing stimulus...
The primary reason for QE is to impact longer term rates. OCR impacts short term rates.
Transmission mechanism is the yield spread ( difference between what it costs to borrow and return on investment ).
As far as I know , one of the definitions of stimulus is :
"a thing that arouses activity or energy in someone or something; a spur or incentive."
What the RBNZ cant control, is when people will borrow, nor can it provide credit worthy borrowers.
Also... at some point super low deposit rate will "stimulate" people out of term deposits and into riskier investments...?? maybe ( this stimulus is also the RBNZs' doing )
J C... then you are redefining the economic definition of stimulus.
https://en.wikipedia.org/wiki/Stimulus_(economics)
Investors seek safety and liquidity of sovereign debt - the return of their money, rather than the return on it - stimulus signifies opportunity not safety.
How else to explain the fact there were bids greater than $14.0 billion seeking to secure an investment stake in the $7.0 billion 0.5% 15/05/24 Crown debt issue, which settled today?
We are at risk of passing the economy into the hands of government.
Audaxes.... In another life were u Stephen Hulme..?
Your knowledge and style of writing remind me of him... he has a website ..OMO
http://www.omo.co.nz/
Yvil, why do you care so much about whether people are critiquing policies they disagree with? In a free society people should always be able to critique the moves made by entities like the Reserve Bank. Also, there is no reason to presume that because people are critiquing those policies on a website, those same people are not simultaneously dealing with what's in front of them in the context of their personal finances.
People are most definitely allowed to critique but I do think many get stuck in their ideological ideas and miss dealing with reality.
bw says he feels "a surge of rage coming", surely if he deals with reality = Reserve banks & governments supporting the economy in whatever way they believe is best, he would know QE will continue and therefore not feel "as surge of rage"
'Reality' is just a persons ability to process information and is limited by past learning, knowledge and cognitive ability.
If you can only see issues from a personal perspective and what benefits me, versus a system as a whole, and the interdependent parts of that system, what you perceive of reality is going to be significantly different.
No point pushing your reality on others as its simply your perception of data/events.
If you want to identify truth/reality, gather information and multi perspectives - ideally conflicting ones. Only then can you find it. Its why I'm regularly comment that I think you might suffer from hindsight, recency and confirmation bias as you already think you know reality. I don't - as its continually changing with each new data point.
Stimulus is intended to increase bank reserves and de-centralised banks target lending programs. It is NOT broad based. In fact, and unfortunately, its targeted in areas where banks can earn the maximum spread not where it is needed. Most likely in NZ, the housing market. Banking needs to change from large banks to more local community banks for purposes of providing funding to business and infrastructure for the betterment of that community. Refer to Germany banking system. In addition, stimulus is not effective unless central banks or governments helicopter the money to tax payers directly , or alternatively, there are willing borrowers to assume further debt. No borrowers, M2 increases while velocity remains stagnant.
Agree with Yvil, one has to come to terms that come what may reserve bank and government - both will try anything and everything to support and boost house price being only feel rich economy in NZ and current situation has given license to government print and distribute in guise of panademic.
More to come just before election as hard for Labour to not take the opportunity presented by coronavirus to win by full majority.
This is not stimulus, you are very wrong thinking that, all that QE will go to everything but the productive economy like it's been happening for the past few months. The only way to stimulate economy at this point is a basic universal income in one or other way that goes directly to the purchasing ability of families.
Globally Central banks have now pumped up the biggest debt bubbles in history so there is no way they can let interest rates rise again. If they do all hell would break loose. It will be interesting to see if we see a return of high inflation or even hyper inflation from all of this money printing though. In that case would Central banks then be in a position where they have to raise rates to curb inflation while also having these debt bubbles hanging over the different Global economies. It will be interesting to see where things go from here that's for sure.
Hi Adam, indeed interest rates can't increase, if they increased significantly, it would create more damage to the economy than CV. Even if, and that's a big IF inflation rises, the central banks won't be able to raise interest rates for fear of bankrupting businesses and home owners and killing their economies
Bullshit is closing all of the businesses, workers having no work and money, govt coming to the rescue with cash then getting criticized for the obvious mistake... the war on covid was fought in the wrong area .. it was the nursing homes where half the deaths occurred. The overpaid dumbos making stupid decisions turned a blind eye to offering the PPE that the nursing homes needed and asked for. Instead they spent their time lecturing everyone but not implementing good procedures. Bloody dumb bunch of politicians.
Hmmm, what actions in particular? Specifically things before the Covid-19 outbreak. I can how some of the crisis response actions could be cast in that light, but i think thats more of an expediency thing than a true belief in trickle down economics, so I'd love to see what changes/policies this govt has bought in that you think embody a belief in trickle down economics.
You'll need to load the interactive chart as the numbers are so crazy the graph is broken.
https://www.nzx.com/instruments/GOV410
Would a Tobin tax suppress the value of our dollar? If so that might stimulate our export economy and thereby the whole economy. It would also provide a much needed extra tax income stream without dampening the economy.
Say .05% on financial transactions. Remember that the money flowing into and out of the country by way of currency traders and the like, dwarfs the money flowing by way of real trade.
ANZ Bank economists have forecast that Australia’s nominal wage growth will slow to a record low of just 0.7% in the first half of 2021. They warn that wages growth could fall to around zero during some quarters, and note that Australia had lower growth in wages than the US and New Zealand prior to the onset of the coronavirus pandemic.
So do we think our nominal wage packet is going to keep outdoing Australia's? Or are we going to join The Rest, and that might involve somewhat of a catch-up ( even lower wages than our competitor economies in the near future)?
I guess lower ineterst rates and more LSAP money will sort out any problems, eh, Adrian.
Any and all current policies enacted by the RBNZ ( and Treasury and The Government - if they indeed understand what they are doing!) are not 'stimulus'. At best they are a bailout of the Banking System and Banks in general.
Orr says as much in his comment: " It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme."
Note: Not in the best interests of the Business Sector of New Zealand or the Citizens of New Zealand but ...the Banking System. ( and, No. They aren't the same thing)
This is going to end so very badly that is hard to know where to take cover. ( and again, No, it isn't in gold or bitcoin, and it certainly isn't in leveraged property holdings of any kind) but at least none of us who read this blog will be able to say 'we didn't see it coming'.
" It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme."
If the RBNZ moves to a negative interest rate policy banks will be paying the government interest on the reserves they accept as settlement for selling government bonds to the RBNZ as counterparties to the LSAP programme, otherwise known as QE. A prolonged RBNZ policy posture employing negative interest rates will destroy the banks' profitability. In this instance one can only assume banks will extract these costs from the willing New Zealand public.
Thanks to supporters the only hope I have to try to come to some sort of grips. Question please.. If people somewhere in the world like what they see in nz and buy nz dollars and store. Does this take dollars out of the nz economy we have just created from the thin air needed for our recovery stage while at the same time going higher in value against the u. S. Dollar. Is this what worries Mr Orr?
Is it all back to front then??
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan
https://www.sciencedirect.com/science/article/pii/S0921800916307510
Abstract
The rate of interest – the price of money – is said to be a key policy tool. Economics has in general emphasised prices. This theoretical bias results from the axiomatic-deductive methodology centring on equilibrium. Without equilibrium, quantity constraints are more important than prices in determining market outcomes. In disequilibrium, interest rates should be far less useful as policy variable, and economics should be more concerned with quantities (including resource constraints).
To investigate, we test the received belief that lower interest rates result in higher growth and higher rates result in lower growth. Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.
Clearly those on this site are feeling really, really secure - in employment, putting food on the table for their families and either being able to pay their rent and servicing their mortgage.
Get over it; the falls in the OCR since 2011 is about trying to achieve economic stability which is about primarily about stimulating the economy - about encouraging investment and protecting jobs. Yes, for many of this site, likely including your job.
The Government's business loans and wage subsidies are again about protecting businesses and jobs - yes, and again, for many on this site, most likely your job.
Nowhere, and I mean nowhere, in this release does Orr refer to propping up the housing market which seems to be the only "me, me" focus of many posting on this site.
Yes, house price inflation is a consequence of RBNZ actions, but surely it is about time some started to suck it up and start to consider the alternatives. Housing affordability is likely to be getting better with historically low mortgage interest rates, removal of LVRs, and a likelihood of some house price correction - all we get posted is "ponzi scheme, ponzi scheme, bubble burst" - pathetic.
RBNZ figures show that over the past three years just on 80,000 mortgages were for FHB - conservatively that is likely to involve up to about 145,000 people.
If you are not one of those 145,000, and envious, of them then you probably need to start asking why, and other than continually moaning and shifting the blame, start to think what need to do about it.
I don't see retirees who planned to use their savings as term deposits to supplement their retirement income and have been adversely affected continuing posting and moaning how the low interest rates are about assisting the young.
Yeah, I'm not looking for or expecting up ticks - I couldn't give a stuff. I am expecting the nature of many of this site to post blurting out "poor me, poor me." Simply a bunch of Quade Coopers.
Printer8 - I gave you a tick, I would have given you 2 ticks if I could with your 'Quade Cooper ' ref !
You are quite right housing affordability has improved ! Seems to me every potential FHB is out there looking because they see the opportunity !
A side note there appears to be a Pandemic in the number of pregnancies that have come out of lockdown, perhaps the new ' baby boomers ' I have termed the phrase 'Pander babies ' might catch on!
'Get over it; the falls in the OCR since 2011 is about trying to achieve economic stability which is about primarily about stimulating the economy - about encouraging investment and protecting jobs. Yes, for many of this site, likely including your job.' - why then is about 20-25% of the US workforce unemployed after a decade of record low interest rates to stimulate the economy and protect jobs, and we will possibly be the same when our wage subsidy ends? Could we be using the wrong type of 'stimulant' do you think?
Should we just do another 10 years of 'low interest rate stimulus' then find we have 30, 40 or 50% unemployment?
> Get over it; the falls in the OCR since 2011 is about trying to achieve economic stability which is about primarily about stimulating the economy about encouraging investment and protecting jobs. Yes, for many of this site, likely including your job.
Then their strategy is a total failure. Here we are after a decade of it, painted into a corner in ZIRP-land with negative "economic stability"and the central bankers desperately trying to stop their mother of all asset bubbles from imploding. Protecting jobs? Our country was flooded with mass immigration for a decade due to so-called "labour shortages". How does that reconcile needing to "protect jobs"? Something was being protected, but it sure as hell wasn't "jobs".
> Nowhere, and I mean nowhere, in this release does Orr refer to propping up the housing market which seems to be the only "me, me" focus of many posting on this site.
Judge them by what they do, not what they say.
> Yes, house price inflation is a consequence of RBNZ actions, but surely it is about time some started to suck it up and start to consider the alternatives. Housing affordability is likely to be getting better with historically low mortgage interest rates, removal of LVRs, and a likelihood of some house price correction.
A house price correction is what increases housing affordability. The rest of your money-lender kool-aid is designed to ensnare people under ruinous levels of debt while they pray that house prices stay in cloud cuckoo land and interest rates NEVER increase for the next three decades. Everybody (including you) knows New Zealand housing is a ponzi scheme, close to the most unaffordable housing on planet earth, some just think it won't ever fail, others just know it's a matter of time. Nobody is envious of the idiots who "sucked it up" and have telephone number levels of debt hanging over them. There is however, widespread disgust at the unelected and unaccountable central bankers that engineered these circumstances and foisted them upon our generation.
Why? Usually just born in the wrong decade, might prioritized paying down student debt, might have retained some faith in the financial system not being totally rigged? What to do about it? Right now the best strategy is to wait and see what happens tommorrow.
When the answer is nose bleed amount of money for a very mediocre house in a hopeless gang infested rip-off backwater like New Zealand, then the wrong questions are being asked.
No, the low interest rates are not assisting "the young", they are harming the young. They are assisting the indebted and asset holders.
Stimulus can be thought of as an increase in spending in the real economy - more G, more autonomous C or a higher marginal propensity to consume, more I, more X-M. It raises demand in the real economy.
QE is just an asset swap that keeps asset prices high and lowers long term interest rates.
QE is supposed to work by inducing wealth effects and encouraging investment by lowering interest rates.
Problem is, on its own, it doesn't work. No matter how low rates are business won't invest if sales are not being made and inventories stand unsold. A hot economy induces demand which in turn induces investment in productive capital. You invest when sales are booming right?
Inflation occurs when real resources including labour are scarce and prices are bid up. Right now all the QE in the world won't cause inflation in the real economy. Pushing on a string. Stop worrying about it. Worry about jobs and employment. Is the planned fiscal stimulus (G-T) enough to close the spending gap between what needs to be spent to reach full employment and what is currently being spent post Covid. Probably not.
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