19 May 2020

RBNZ not expanding quantitative easing programme any time soon

5:22 pm on 19 May 2020

The head of the Reserve Bank says it is too early to say whether the central bank will have to significantly expand its bond buying programme to cope with the extra debt the government plans to raise over the next few years.

Adrian Orr, Governor of the Reserve Bank of New Zealand

Reserve Bank governor Adrian Orr Photo: RNZ / Claire Eastham-Farrelly

The Reserve Bank (RBNZ) last week expanded its quantitative easing programme up to $60 billion, which has been its key policy to inject liquidity into the economy and keep downward pressure on interest rates.

The government's budget showed it planned to borrow up to $190bn over the next four years to finance Covid-related packages.

That has led some commentators to suggest the RBNZ will have to further expand bond buying to mop excess supply and stop any spike in rates.

"By August, we expect the asset purchase programme to be expanded to $90bn. This would allow the RBNZ even greater flexibility to absorb issuance and keep the yield curve (interest rates) sustainably low and flat in order to support the economy," ANZ economists said in their weekly commentary.

RBNZ Governor Adrian Orr admitted he's tiptoeing around the issue at the moment.

"The fact there are now going to be a lot more government bonds on issue with the government's fiscal spending gives us the option to expand our quantative easing programme, buying a proportion of the government bonds on offer... [but] it's far too early to be thinking about what next... over the next 12 months we'll be increasing our purchases and watching how effective that is."

Orr said there is little or no prospect of negative interest rates, cutting the official cash rate below zero, at this stage, partly because it's not needed at the moment but also because three or four big banks are still not prepared for them, but it remained a future option.

He said other potential options to support the economy included widening the scope of assets it buys, such as company bonds; buying foreign assets, which would pressure the New Zealand dollar; targeted lending to banks; forward guidance on interest rates and prices; and possibly direct buying of bonds from the government.

"The principles will be do we need further stimulus, what is the most effective tool, what are the efficiency issues we need to worry about, can we operationalise it, and what are the implications for the crown balance sheet."

Banks need courage to lend

Meanwhile, Orr renewed his called for retail banks to step up and be "courageous" in helping households and businesses to cope financially by passing on low interest rates to the fullest extent, as well in the lending decisions they make.

A composite image of New Zealand's four major retail banks - ANZ, ASB, BNZ and Westpac.

New Zealand's four major retail banks - ANZ, ASB, BNZ and Westpac. Photo: RNZ / Dom Thomas

Some retail banks have been criticised for being too tough in making decisions, requiring too high levels of security for loans, and not making the most of the government's guaranteed loan scheme for small businesses.

Orr accepted retail banks had done a lot in a short space of time, but is expecting more.

"Courageous, I'm not as convinced, whilst there's a lot of activity, there's a lot of mixed messages as to whether some of these programmes are being used , we're being told by some fo the banks that the frameworks are good, and watch this space."

He also said the retail banks needed to make sure they pass on the lowest interest rates possible to customers.

"We expect to see as competition improves and as credit demand comes back from zero .. that those (interest) margins will be narrowed, that competition back in deposit taking and competition in the lending space."

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