Reserve Bank ups 'quantitative easing' from $33b to $60b

Wednesday, 13 May 2020

Reserve Bank governor Adrian Orr gave the bank's word in March not to move the OCR before March next year.

The Reserve Bank has agreed to spend $60 billion on quantitative easing to prop up the economy in the wake of the coronavirus pandemic.

That is up from its previous spending cap of $33b.

Governor Adrian Orr said it had modelled 'three scenarios' which would see unemployment peak at between 9 per cent and 12 per cent.

The bank has left the Official Cash Rate at 0.25 per cent after Orr gave the central bank's word in March that it would not move the rate for 12 months.

The commitment did not stop some banks from speculating that the Reserve Bank might move the OCR into negative territory even before the year is out.

* Reserve Bank to buy $30b of government bonds to ease monetary conditions

* Adrian Orr: Economic shockwaves will eventually give way to vibrant economy

The Reserve Bank appeared to suggest that an earlier move could not now be ruled out.

The bank's monetary policy committee said it was prepared to use additional monetary policy tools if and when needed 'including reducing the OCR further'.

But it said its 'forward guidance' was still that the OCR would remain at 0.25 per cent until early 2021.

Deputy governor Geoff Bascand said it had written to banks asking them to ensure their IT systems could cope with an OCR below zero by the end of the year.

The New Zealand dollar fell by just over 0.5 US cents to US60.3c within an hour of the bank's monetary policy statement.

National Party finance spokesman Paul Goldsmith said the Reserve Bank's forecasts equated to predicting '150,000 job losses over the next six months'.

“This is a devastating prediction and emphasises the very real need for a government with a credible economic plan to steer New Zealand through,' he said.

'We know big spending will be needed in tomorrow’s Budget to support businesses and save jobs but we must not dig the hole deeper than it needs to be,' he said.

The bank's quantitative easing programme is seeing it buy central and local government bonds from existing investors, with money that the Reserve Bank essentially creates on its computers.

The goal is to lower interest rates and free-up cash for private sector investment.

Orr said he was 'very pleased' with the impact quantitative easing was having.

'We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers,' the bank said in its statement on Wednesday.

The Reserve Bank has now agreed to add inflated-linked bonds to its quantitative easing programme, in addition to its existing purchases of fixed-interest bonds.

'The global economic disruption caused by the Covid-19 pandemic is expected to persist and lead to lower economic growth, employment, and inflation both in New Zealand and abroad,' the bank said.

'Even if New Zealand successfully contains the spread of disease locally, reduced world activity will mean lower demand for many of New Zealand’s exports,' it warned.

The Reserve Bank described the global environment as 'volatile and uncertain'.

'Some commodity prices are strong, but many of New Zealand’s trading partners are experiencing economic disruption and declining activity.

'Despite pockets of relative strength, conditions in trading partners will be a drag on domestic activity,' it said.

The balance of the $60b of bond purchases would take place over the next 12 months, it said.

About $10b had been spent by the Reserve Bank on the programme so far, ANZ said.

ANZ said it was interesting the Reserve Bank's 'baseline scenario' assumed the Government would spend 'almost the full $52b' that Parliament had pre-approved it to spend on responding to the Covid-19 shock.

ASB chief economist Nick Tuffley said the increase in the quantitative easing programme was 'as expected' and had been widely tipped.

A negative OCR remained 'a possibility', but still seemed unlikely in 2020, he said.

'We have reservations over how beneficial a negative OCR would be in promoting easy credit conditions.'

The Reserve Bank also still seemed to have its doubts, Tuffley said, noting the central bank said further OCR reductions at this stage would not be effective in reducing borrowing rates.