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RBNZ Chief Economist Yuong Ha on what it would take for the RBNZ to drop its tightening bias, and why the RBNZ is hesitant about selling the government bonds it owns

RBNZ Chief Economist Yuong Ha on what it would take for the RBNZ to drop its tightening bias, and why the RBNZ is hesitant about selling the government bonds it owns

The Reserve Bank (RBNZ) is maintaining the tightening bias detailed in its August 18 Monetary Policy Statement, even though the number of Covid-19 cases in the community has escalated since then.

RBNZ Chief Economist Yuong Ha also clarified (see video interview above) that the RBNZ would rather not try to tighten monetary policy by actively selling the bonds it bought via its Large-Scale Asset Purchase (LSAP) programme. It would rather take the well-trodden path of raising the Official Cash Rate (OCR).

Furthermore, Yuong confirmed the RBNZ would keep its Funding for Lending Programme (FLP) in place until the end of 2022 to uphold the “contractual arrangement” it made with retail banks last year.

RBNZ remains hawkish

Ha was clear the RBNZ remains eager to lift the OCR as soon as possible.

RBNZ Governor Adrian Orr last Wednesday said Monetary Policy Committee members would need to see “significant different outcomes - in particular to demand - to change our mind”.

Ha echoed this sentiment, but wouldn’t give specifics on how long lockdowns would need to be, or how much of a U-turn the economy would need to make, for the RBNZ to drop its tightening bias.

He also indicated the RBNZ considered the possibility there could be a Covid-19 outbreak when it prepared the bulk of its hawkish Monetary Policy Statement before news of Covid-19 in the community emerged.

“The position we're in now, going into this lockdown, feels quite different to where we were 12 to 18 months ago,” Ha said.

“Back then we were sort of staring into this huge pit of uncertainty. We were really concerned about how the economy would recover; how households would respond. There were no vaccines in sight. Fiscal policy hadn't yet made its move.

“Where we're sitting now is that we've learned a lot, even though this lockdown feels just as uncertain in terms of duration and of course.”

Ha said the RBNZ knew policy responses - particularly by government - were effective. He said it also knew households are largely willing to spend up once they’re out of lockdown, if people are healthy and confidence is maintained.

“You'd have to really fundamentally change and challenge some of those working assumptions around how households respond [to lockdowns] for us to really change our view [outlined in the Monetary Policy Statement] materially,” he said.

Covid-19 might be with us permanently, but very loose monetary policy can't be

The RBNZ said in the Statement that it was committed to lifting the OCR to what it believed to be the neutral rate of 2% (which is neither stimulatory or contractionary) by 2023 despite Covid-19 possibly hampering productivity long-term. 

"The emergence of highly contagious variants of Covid-19 reduces the likelihood that New Zealand will be able to ease border restrictions in the future and be Covid-19 free," the RBNZ said.

"This will lead to ongoing and challenging trade-offs between public health, economic outcomes, and mobility...

"Prevalence of the disease may result in permanent changes in the way we work and interact, which could lower the productive capacity of the economy on an enduring basis.

"How the global economy adapts to the ongoing presence of Covid-19 will also have significant implications for the New Zealand economy, via trade, financial, and confidence channels."

Hesitation over going down an untrodden path

As for the LSAP, Ha said the RBNZ’s initial thinking is that it isn’t keen to actively sell the $54 billion of New Zealand Government Bonds it has bought from banks, fund managers, etc since March 2020.

By buying these bonds it put downward pressure on interest rates. Actively selling them before they mature would tighten monetary conditions.  

Ha said, “We know a lot more about how to calibrate tightening policy through an OCR. We know less about how you would do that through selling down government bonds.”

He was also wary of the RBNZ not flooding the market with bonds at a time Treasury’s bond issuance remains elevated ($30 billion of issuance is planned for the 2021/22 year).

“The key thing to remember is, on the way down, you sort of made a big splash about the LSAP. Markets are dysfunctional, you want to keep interest rates low,” Ha said.

“On the way out, you want to be quite methodical and want to be operational in the background. We're not intending to send massive policy signals through the withdrawal of the LSAP programme.

“We largely see it now as just managing... the holdings of those assets on our balance sheet.”

The RBNZ is expected to publish a strategy for managing its bond portfolio in coming months.

See the video interview for more on the FLP, and what the RBNZ hopes to achieve by keeping the OCR at 0.25%.

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18 Comments

sounds like another 25% increase in house prices in the 2nd half of 2021.

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Care to argument who's going to buy at the prices you say or is this just wishful thinking?

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If they end up going negative with interest rates, there are a lot of people looking for houses who have missed out on other houses. FOMO is still very bad. But it would be good to see house prices crash this time, and the experts be wrong again.

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Interesting interview. Ready or not, well-overdue interest rates raises are coming.

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They will buckle when push comes to shove thanks to Delta.

Either way another increase in house prices this summer.

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‘Yawn’ give it a break will ya!

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Hi Jenee, See the smirk on his face as this delta virus has and will put new fire in housing ponzi

https://www.newshub.co.nz/home/money/2021/08/first-home-buyer-enquiries…

Last year when they gave stimulus and house prices rocketed, their response was that they were taken by surprise SO will they act now as all data suggests that .............

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A net 48 percent of mortgage advisors saw fewer investors. A net 3 percent saw more FHBs. Your theory might be right but the Tony Alexander survey really doesn't back it.

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What people say and actually end up doing are two different things.

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Your theory might be right but the Tony Alexander survey really doesn't back it.

You mean the survey data he collects from his mailing list? Because that's what it is. Somewhat embarrassing this guy calls himself an economist and gets away with this nonsense.

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Do you call yourself a bitcoin investor of bitcoin ... that is embarrassing

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He was also wary of the RBNZ not flooding the market with bonds at a time Treasury’s bond issuance remains elevated ($30 billion of issuance is planned for the 2021/21 year).

Banks cannot get enough liquid, safe government assets on their balance sheets - witness the above mentioned $54.0bn of OCR earning reserves sitting on the RBNZ's liability ledger. Furthermore, banks overbid NZ government bond issuance via syndication and tenders with zealous alacrity week in and week out.

US banks' balance sheets are laden with government liabilities in addition to reserves at the Federal Reserve.

In the process business loans (C&I) for productive GDP qualifying enterprises are falling.

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"What we learned is that"-----Nothing

An immature business analyst can tell you, if you set loose policies people will jump to most favourite asset (property) at any price because money is cheap which will lead to price boom.

After more than one and a half year of COVID we are thinking, we are looking, we are analysing, housing is not our mandate (LVR removed by you) & we are waiting (prices doubled). Is this hawkish stand?
No it's clearly bearish with empty warnings, having possibility of another 10% increase in value.

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I am quite surprised as to how bullish many people are on the economy.
Delta is a different beast, and this lockdown could be long.
And people need to factor in the cumulative impacts of repeated lockdowns, this might be the straw that breaks the camel's back for some businesses.

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Ha said, “We know a lot more about how to calibrate tightening policy through an OCR. We know less about how you would do that through selling down government bonds.”

I wish he had said, 'What flavour of fool would swap bonds paying 3% for cash earning 0.25%?!?'

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We probably have at least three months of waiting before the next move just because CPI data is only published quarterly. They'll want to get a solid read on inflation post-Indian Delta variant before adjusting the OCR.

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I wonder what his kid was getting from the kitchen, hopefully had a good feed...

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yuong ha is a lucky hawk with the pleased demeanour of somebody whose excellent salary gets paid like clockwork and he doesnt have to go to work right now.he is happy to continue the FLP and doesnt want to sell any of the bonds held by the bank.not his problem where the money comes from if the lockdown stretches out and sucks multiple billions in subsidies and business support.

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