The Reserve Bank has again put the foot on the accelerator with its quantitative easing programme, increasing it to $100 billion from $60 billion - although it has also increased the duration of the programme by another 12 months.
However, it has also indicated it is likely to "front load" its purchase of assets as the market for bonds is now bigger and central bank purchases would be able to absorb a bigger share now of the bonds without affecting market functioning. The RBNZ has sought and received approval from Finance Minister Grant Robertson to be able to buy up to 60% of outstanding bonds. Previously the indemnity from losses on bond purchases provided by the minister covered purchases on only up to 50% of outstanding bonds.
Additionally, the RBNZ appears to be opening the door ever wider for the prospect of a negative Official Cash Rate.
Capital Economics Australia and New Zealand economist Ben Udy said the RBNZ had "sent its clearest message yet" that negative rates are coming.
"We still expect the Bank to wait until next year before bringing the OCR into negative territory, though the risk now is that the Bank moves sooner rather than later."
The increase in amount of "Large Scale Asset Purchases" (essentially money printing) the RBNZ announced on Wednesday is more than most economists imagined - but it does come just hours after confirmation that community transmission of Covid-19 has returned to New Zealand and with the largest city Auckland going into a Level 3 lockdown from noon on Wednesday.
And in what will be seen as an extremely 'dovish' statement, RBNZ Governor Adrian Orr said on Wednesday that the RBNZ's Monetary Policy Committee (MPC) had also agreed that a package of "additional monetary instruments" must remain in active preparation.
The deployment of such tools would depend on the outlook for inflation and employment.
The package of further instruments included a negative Official Cash Rate supported by funding retail banks directly at near-OCR (a Funding for Lending Programme). Purchases of foreign assets also remained an option. The Official Cash Rate currently stands at 0.25%, where it has been since March, at which time the RBNZ pledged to keep it at that level for 12 months.
Orr said the MPC had expressed a preference for considering a package of a negative OCR and a ‘Funding for Lending Programme’ in addition to the current Large Scale Asset Purchase (LSAP) programme. The Committee had instructed staff to prepare advice on the design of a package for deployment if deemed necessary, taking account of the operational readiness of the financial system.
Previously the RBNZ had said that a negative OCR could not be applied at the moment because some banks' operating systems could not handle negative interest rates. The banks have, however, been asked to get their systems ready to cope with negative interest rates by the end of this year.
The report from the latest meeting of the MPC said that the committee had agreed that at the moment the most immediately available suitable tool was an expansion to the LSAP programme - or QE.
"The Committee discussed expanding the LSAP programme with the aim of adding more stimulus by lowering retail interest rates and the exchange rate.
"Members noted the increase in New Zealand’s sovereign debt issuance, which means that the market for bonds is now larger than previously. The Committee noted updated staff advice that central bank purchases could absorb a larger proportion of the total market than previously thought without affecting market functioning. Members noted and endorsed staff advice that a larger LSAP programme would mean purchases could be front-loaded in order to put more downward pressure on New Zealand wholesale interest rates.
"The Committee agreed that an increased LSAP limit of up to $100 billion by June 2022 would enable the Bank to implement purchases to lower wholesale interest rates. Members agreed that the Bank should retain the flexibility to adjust the pace and composition of bond purchases as market conditions dictate.
"The Committee also agreed that any future move to a lower or negative OCR, if complemented by a Funding for Lending Programme, could provide an effective way to deliver monetary stimulus in addition to the expanded LSAP if needed."
On the impact of Covid-19, Orr said any significant change in the global and domestic economic outlook remained dependent on the containment of the virus, "which is highly uncertain as evidenced today by the return to social restrictions in New Zealand".
"Such uncertainty is stifling household and business spending appetites, as highlighted in confidence surveys. Given the ongoing health uncertainty, there remains a downside risk to our baseline economic scenario."
This is the statement from the bank:
Tēnā koutou katoa, welcome all.
The Monetary Policy Committee agreed to expand the Large Scale Asset Purchase (LSAP) programme up to $100 billion so as to further lower retail interest rates in order to achieve its remit. The eligible assets remain the same and the Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March.
Reflecting a possible need for further monetary stimulus, the Committee also agreed that a package of additional monetary instruments must remain in active preparation. The deployment of such tools will depend on the outlook for inflation and employment. The package of further instruments includes a negative OCR supported by funding retail banks directly at near-OCR (a Funding for Lending Programme). Purchases of foreign assets also remain an option.
Over recent months New Zealand had contained the spread of COVID-19 locally, allowing a relaxation of social restrictions and a recovery in economic activity. Recent indicators highlight that the faster return to social norms and a higher proportion of employees working from home has seen output and employment recover sooner than projected in our May Monetary Policy Statement. Recent spending also reflected pent up demand resulting from the lockdown period.
However, the severe global economic disruption caused by the pandemic is persisting. Any significant change in the global and domestic economic outlook remains dependent on the containment of the virus, which is highly uncertain as evidenced today by the return to social restrictions in New Zealand. Such uncertainty is stifling household and business spending appetites, as highlighted in confidence surveys. Given the ongoing health uncertainty, there remains a downside risk to our baseline economic scenario.
International border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions. Commodity prices for New Zealand’s exports remain robust, but this has been partly offset by a rise in the New Zealand dollar exchange rate moderating the return to local export producers.
Ongoing support for domestic economic activity is being provided through significant government spending on business assistance and household income support. This will be supported by a rising level of government investment. However, there will be a transition of policies in the near-term, with the announced end of the Wage Subsidy likely to coincide with a decline in employment.
Monetary policy will continue to provide important economic support in the period ahead. Its effectiveness is evidenced by retail banks’ lower funding costs and lending rates, which are benefiting businesses and households. It remains in the long-term interest of banks to fully pass on the benefits of lower funding costs to their customers.
The Monetary Policy Committee will provide additional stimulus as necessary to meet its remit.
Meitaki, thanks.
More information
- Download the August 2020 Monetary Policy Statement (PDF 1.85MB)
- Alternative Monetary Policy Tools
- MOF/RBNZ Memorandum of Understanding regarding the use of alternative monetary policy tools (PDF 883KB)
Summary Record of Meeting - August 2020 MPS
The Monetary Policy Committee (MPC) discussed the outlook for inflation and employment, and whether current monetary conditions will achieve its policy remit. The ongoing economic effects of the COVID-19 pandemic were central to the discussion. Members agreed that significant uncertainty existed as to virus containment, and that this was dampening economic confidence globally.
The Committee noted that New Zealand had contained the local spread of the virus, thereby enabling the relaxation of social restrictions. Members agreed that recent domestic economic activity and employment had been stronger than expected in the May Monetary Policy Statement. They noted that this was largely due to the earlier than assumed relaxation of social restrictions, a higher proportion of people working from home, and the pent up demand that arose due to the lockdown period.
The Committee noted that the recovery in economic activity had been uneven across industries and regions, with ongoing international border restrictions severely curtailing migration and services’ export earnings – such as tourism and foreign student education. The Committee noted that domestic economic activity remains below the level it was at prior to the COVID-19 outbreak, and that a sustainable recovery in investment and employment depends on both the degree to which the virus is contained effectively and on a reduction in uncertainty in the general economic environment. Members noted that fiscal policy continues to provide the primary support to the economy, as is appropriate given the pace and scale of the economic shock.
Members agreed that global uncertainty is significantly dampening consumer and business confidence to spend, invest, and employ over the near term. As a result the Committee agreed that the outlook for global economic activity remains weak. It also noted that a rise in the New Zealand dollar exchange rate has moderated local exporters’ incomes.
Members discussed the balance of risks to the baseline economic scenario prepared for the August Statement. Members agreed that, given the primary economic risks are health-related, as evidenced by recent events, the economic risks remain to the downside. The Committee noted a risk that persistent low inflation and employment become embedded in people’s expectations, creating the need for more monetary stimulus than otherwise.
The Committee discussed the current effectiveness of monetary policy. The Committee agreed that monetary policy remains effective and has a strong support role for the economy through improving cash-flow, increasing the incentive to invest, and keeping the exchange rate lower than otherwise. Members agreed that these transmission channels are important for the Committee to achieve its remit and would be important for enabling any necessary resource reallocation during a recovery.
Members noted that retail interest rates have declined consistent with the lower funding costs brought about by the recent monetary easing. The Committee also agreed that it remains in the best long-term interests of banks to continue to pass on the lower wholesale interest rates to their customers, and to maintain the supply of credit.
The Committee then discussed the appropriateness of current monetary settings for achieving its remit. The Committee agreed that, given the weak economic outlook, low inflation and employment, further monetary stimulus is needed to achieve its remit objectives.
The Committee discussed the monetary policy strategy having regard to the soundness and efficiency of the financial system, and to avoiding unnecessary instability in output, interest rates and the exchange rate. Members weighed the risks associated with potential actions in pursuit of achieving the operational objectives of the remit against the risks and consequences of insufficient monetary stimulus. On balance, the Committee agreed that a deep and protracted economic downturn with high unemployment would pose a more serious risk to financial stability.
Members discussed the implications of alternative monetary policy tools for financial stability. The discussion covered the tools that are being considered, noted the lessons and experiences from other central banks, and considered the calibration of a package of monetary instruments. The Committee agreed that a lower or negative OCR, a Funding for Lending Programme, purchasing of foreign assets, and interest rate swaps all provided policy optionality.
The Committee noted staff advice that the design features of each tool could be selected to maximise effectiveness and reduce risks to financial stability. The Committee expressed a preference for considering a package of a negative OCR and a ‘Funding for Lending Programme’ in addition to the current Large Scale Asset Purchase (LSAP) programme. The Committee instructed staff to prepare advice on the design of a package for deployment if deemed necessary, taking account of the operational readiness of the financial system.
The Committee agreed that the most immediately available suitable tool is an expansion to the Large Scale Asset Purchase (LSAP) programme. The Committee discussed expanding the LSAP programme with the aim of adding more stimulus by lowering retail interest rates and the exchange rate.
Members noted the increase in New Zealand’s sovereign debt issuance, which means that the market for bonds is now larger than previously. The Committee noted updated staff advice that central bank purchases could absorb a larger proportion of the total market than previously thought without affecting market functioning. Members noted and endorsed staff advice that a larger LSAP programme would mean purchases could be front-loaded in order to put more downward pressure on New Zealand wholesale interest rates.
The Committee agreed that an increased LSAP limit of up to $100 billion by June 2022 would enable the Bank to implement purchases to lower wholesale interest rates. Members agreed that the Bank should retain the flexibility to adjust the pace and composition of bond purchases as market conditions dictate.
The Committee also agreed that any future move to a lower or negative OCR, if complemented by a Funding for Lending Programme, could provide an effective way to deliver monetary stimulus in addition to the expanded LSAP if needed.
On Wednesday 12 August, the Committee reached a consensus to:
- expand the LSAP programme to purchase up to a maximum of $100b by June 2022;
- direct the Bank to actively prepare a package of additional monetary policy tools, to be deployed if and when the outlook for inflation and employment requires additional stimulus, taking into account operational readiness; and
- hold the OCR at 25 basis points in accordance with the guidance issued on 16 March.
103 Comments
If QE creates inflation, then where is it? It's been 12 long years since most economies got the printer going; nearly 30 in Japan's case, so where is this much-vaunted Inflation?
Yers, we have 'inflation' in assets prices - property; stocks and art etc. But in mainstream, everyday items? Nothing out of the usual. And it's only going to get worse.
QE, or whatever one wants to call it, doesn't work the way it's widely imagined.
As the great Milton Friedman said "inflation is everywhere and always a monetary phenomenon" The inflation is there, its just that the methodology they use to calculate it is absurd, so it doesn't show in their CPI's etc. If you look at things that havn't changed over the years, a dozen eggs, 500grams of steak, a 120 sqm house, on 600 sqm of land in Hamilton East the increases in these items correspond to the increase in the broad money supply "M3". Or 5-10% per year. Granted consumables haven't increased much in the last 15-20 years because of China. To be fair this QE will hit the base money supply "M1", which can have the effect of not causing inflation in the short term so long as the broad money supply "M3" remains steady. However their may be inflationary issues down the line, depends on what they decide to do with the QE in the future.
Inflation occurs where the money flows. Easing does not put money in the hot hands of consumers, it puts it in the hands of asset holders. Thus the easing we see is primarily asset inflation and would not be expected to substantially impact CPI. This is not because of some CPI conspiracy, or because of 'China' but rather because easing is not even throughout the economy, so expecting an evenly distributed effect is flawed.
So ill ask you this, show me the evidence you have to defend that eggs and steak are rising in price by 5-10% per year? The CPI food index from 2009 through until today's states an annual average of 1.4%.
Everyone including reserve banks are experimenting not knowing what the outcome will be or how and what they will do in future and till when the mint will be kept open.
Now reserve bank have created a hole for themselves to be blackmailed whenever in future they plan to raise interest rate or stop printing money irrespective of how good the economy is at that time.
The bubble/wound getting bigger and for once the puss has to come out for it heal. Economy like Nature will run its own course / cycle.
Now you're talking!
It's all meaningless - see mine above.
Until we get Productivity in line with 'Money printing' there is no way out of the corner we have painted ourselves into.
What happens eventually?
The nominal price ticket attached to everything will crash.
Wages will plummet and unemployment skyrocket.
Indeed. This advertisement from Grayscale is right on point https://twitter.com/Grayscale/status/1292808728253784065
Beardsley Ruml, director of the New York Federal Reserve Bank (1937–1947), and was its chairman from 1941 until 1946 had this to say about taxation, since the end of the gold standard, "Taxes for Revenue are Obsolete". The real purposes of taxes were: to "stabilize the purchasing power of the dollar", to "express public policy in the distribution of wealth and of income", "in subsidizing or in penalizing various industries and economic groups" and to "isolate and assess directly the costs of certain national benefits, such as highways and social security". https://en.wikipedia.org/wiki/Beardsley_Ruml
Just think, we are only six months into this, our government shows no signs of accepting herd immunity as an option, and we haven't done anything except kick the economic problems down the road and pay wages to keep people in jobs that won't exist when the wage subsidies end.
Perhaps we just need to make sure every New Zealander has one house and one investment property, and the Reserve Bank can keep making everyone rich by inflating those assets for a wealth effect. The only missing piece we have currently is that not everyone has those houses. But while we're giving out wealth we may as well do that too.
was always going to be that way. Think I remember saying that people needed to use this time to get the house in order, don't go on mortgage holidays until last resort etc etc..but instead opposite has happened, and yep that can was just being kicked down the road.
I'm seriously worried the idealists in charge are going to push Auckland into level 4 on Saturday? The authorities are already shutting off the city.
Don't really see how people are accepting this? I guess the "free" money from the govt are keeping the mob content for now. Will be interesting to see how this plays out. I can see a blood bath economically, most people I take to in the business community are sort of just keeping their head above water at the moment. Think another lockdown will cause absolute carnage.
I think the approach to date has been, overall, the right one.
However, I now think it's time to move to a non-lockdown approach (although I don't think the government will go in this direction...).
Keep doing the things we are doing around quarantine etc.
As others have said, this virus may be around for a while, we may not get a vaccine or not for a while, we need to start living with it rather than pretending we can permanently eliminate it.
The data is out from Sweden - their approach has worked and they have herd immunity.
Both Level 4 lockdown and COVID are going to cause deaths from here. It's just a choice as to which one we think will cause more over the long term. My money is on lockdown killing far more people.
I've been watching it but I don't think that call can be made at all. Most of what I've read contradicts your theory, but it's really too early to say;
https://journals.sagepub.com/doi/full/10.1177/0141076820945282
Their method seems very good, and the population seem intellignet, cooperative and sensible. I can't see that same level of behaviour long term in NZ. But their death rate is very high, circa 6k+ for a population of 10million, how would we have considered 3k deaths in NZ?
However, in 3-4 years, we might see the eventual numbers and feel differently. The challenge is that we won't know the answer for years......
You talk the big talk. But I hope, none of you get it...
I have elderly and young. But no consideration is appearing anywhere for the young....nor for all those who have just had their cancer treatments (and son on) cancelled today.
I’m getting angry at the apparent unlimited price we are prepared to pay to extend the lives of the unwell and those who make poor lifestyle choices for a few months.
Um, who elected this reserve bank governor?
Who somehow has the power to simply write open checks without any due process that we the taxpayers have to pay for in the future??
Seriously... this is like "here you go citizen - have another $8,186 of public debt that you have not agreed to" for every man, woman and child in New Zealand...
wtf?
And look at what has happened to the price of gold + housing + stock market in that time...
1971 money stopped being 'money' which was directly tied to/ convertible to hard assets (gold) when Nixon defaulted
It then became a fiat currency which ALWAYS end up getting printed into nothing...
Let the housing Ponzi scheme continue. At all costs. Orr he is really smart: he has discovered that the solution to any problem is similar to the one behind the farsighted policies of Mugabe, and of the of brilliant policies of the Weimar Republic in the early 20's. Bravo.
Sam
" . . . the dollar will fall" - That is half the idea - advantage exporters, maintain jobs, try to maintain a stable economy . . .
The medium term dilemma for FHB - apart from job and income security - is probable some house prices upward pressure, mortgage rates somewhat downside.
Probably you're just venting and don't really want answers. But the RBNZ has statutory independence via the RBNZ act 1989 and is accountable to parliament. The intent of statutory independence is to insulate monetary policy decisions from political pressures -- think goosing the economy just before an election.
How well that is functioning in the present circumstances is however debatable.
realterms
Correct on both accounts - lots of venting and RBNZ accountable to parliament (e.g. inflation targets) through Reserve Bank Act.
Venting explainable; RBNZ action regarding QE and interest rates has - and is likely to continue to - put upward pressure on house prices and that is tangible and contrary to the interests of many on this site. What is not tangible is RBNZ actions are about stimulating businesses (especially the export sector) and consequently the retention of jobs. QE will also put upward pressure on share market and disadvantage those with cash - but that is neither relevant nor important to the narrow perception of many on this site.
Yvil, the concern is you speak as if we should have no regard for moral issues, wider societal effects, or the taking of wealth from young and future generations to prop fewer folk up. Even if one benefits from the status quo, you seem to present that one cannot also state the need for change for better.
Where would you have stood on other issues of exploitation of folk for inflating your own wealth? Child labour? Exploitation of migrant labour? It is what it is so you may as well benefit from it, you can't change it so why bother asking for better for others?
Where does that line sit, for you? Is there a too far in terms of taking wealth from other generations for your own enrichment? Are the other generations economically expendable for your pleasure?
My view is that I do the best I can for my family by playing by the rules, if the rules are unfair, blame the rules, not me.
My view is also that you and Foreign Buyer are hypocrites by claiming that you know what is fair and what is not. It's not a fair world and all of us typing on our smart devices sitting in a cosy warm house, maybe with cup of coffee and biscuits while hundreds of millions don't have proper shelter, food, water, education etc is certainly not fair.. If you and FB are that concerned about fairness, why don't you donate half of what you have to some in Africa, South America or Asia? I suspect it's because you only complain about things being unfair when you are at the short end of a deal.
The saying is "never bet against the FED (or RBNZ)" for a reason.
My issue is, how does all this monetary policy eventually play out geopolitically? Politics will eventually trump everything else, every time. (NB I am using the broader meaning of politics, ie the power structures that organise society, rather than the existing structure).
Um, Messily, if history is any guide, GN....Oddly enough, George Friedman (Storm before the Calm) has a - dare we say the word - Optimistic long view. Podcast from RNZ here.
Govt should mail out face masks and dummys for everyone in the country. I get very angry at all this 'controlling the message' BS. Govt comms are actively working against the best interests of NZers who would benefit from being delivered the facts ASAP so they can modify their behavior in a rational and responsible manner to reduce damage. Their furtiveness, evasions and lies (eg early testing, PPE and flu vaccination availability) are destroying trust in govt institutions.
Your message sounds like it comes from the 'freedom' lovers in the USA and Victoria, you know, the ones spreading the virus while ignoring health messages. I am satisfied that we get 'the facts' pretty well. Sure, aspects of of the Health Department's performance have been below what we want but it has improved and has been better than virually any country outside the SARS group. Most Kiwis trust the Health response and the Minister of Finance's responses like the Employment subsidy and the Mortgage protection measures. I am not sure which 'govt institutions' you refer to.
So with all this Printed Money, we'd expect the price of NZD/Gold to rocket, right?
What's happens?
It's fallen another 50 bucks; $200 off its highs of a couple of days back.
That should tell us all what's coming......
Liquidity; cash; credit bank account balances even at minus 5% are crucial.
You can't feed yourself on gold or houses or art or motor vehicles. All your can to swap those items into food is ....sell them.
Well The gold/NZD price doenst mean shit in world terms, Gold/USD is just having a correction, along with the S&P 500.
I am just waiting for the the stock market to catch up with the reality in America and return to its actual levels. But that isnt a thing now with the money printer going Brrrr...
Inflation is upon us daily with price changes all the time bread , milk , etc just take a look at everyday items they are always going up in price from month to month. It only has to be slight increase just so its not noticeable , thats inflation. Look at a can of coke cost me $2.50 the other day and bottled water.
Be prepared 1 - 1.5% mortgage rates are coming , if your loans are coming off fix rates dont refix yet rates are going down.
Inflation is upon us daily with price changes all the time bread , milk , etc just take a look at everyday items they are always going up in price from month to month. It only has to be slight increase just so its not noticeable , thats inflation. Look at a can of coke cost me $2.50 the other day and bottled water.
Be prepared 1 - 1.5% mortgage rates are coming , if your loans are coming off fix rates dont refix yet rates are going down.
What are people's picks for timing of a negative OCR?
Before last night, I would have said possibly early next year, or more likely as contingency for a credit crisis.
The latter is still my central view, however given the last 24 hours, I think if Auckland is in lockdown for more than a week, it could be employed much sooner, perhaps by October.
The Reserve Bank has again put the foot on the accelerator with its quantitative easing programme, increasing it to $100 billion from $60 billion - although it has also increased the duration of the programme by another 12 months.
Hmmmm .... government liabilities on banks' balance sheets could end up being ~25% of their assets over the next two years.. Is it government policy to crowd out risky customer loans with HQLA and settlement cash to create fortress bank balance sheets with little growth related lending other than that undertaken when underwriting new Crown debt issuance?
I didn't say that. I just looked at current banks' debt securities asset levels ($56.618 bn) and added around another $105.00 bn of settlement cash deposits representing RBNZ credit for QE bond sales.
You could explain the parabolic rise in government security ownership exhibited by large banks in the US - graphic evidence
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