Reserve Bank may choose to go longer but not harder on quantitative easing

Friday, 7 August 2020

Reserve Bank governor Adrian Orr talks with Stuff political reporter Thomas Coughlan in June.

ANALYSIS ANZ is tipping the Reserve Bank will up the cap on quantitative easing to $90 billion when it issues it next monetary policy statement on Wednesday, while Kiwibank is tipping a lift to $100b.

The Reserve Bank helped stoke those expectations back in June when it said it was not yet clear whether the monetary stimulus it had delivered to date was “sufficient to meet its mandate'.

It appeared to have at least one eye on the New Zealand dollar which was rapidly gaining ground at the time, creating some nervousness for Kiwi exporters.

In case the dovish signals the central bank was sending weren’t clear enough, it said any increase in its $60b QE programme would 'need to be of sufficient magnitude to make a meaningful difference'.

* Raising cap on money printing to $100b and buying US bonds tipped as options for Reserve Bank

* Reserve Bank holds OCR at 0.25% but says not clear stimulus sufficient

Recent strength in the housing market is another reason not to further loosen money supply.

Queue the salivation over tens of billions of dollars more being tipped into the money supply.

But as Reserve Bank chief economist Yuong Ha said in correcting a webinar host some days afterwards, it did not commit to any action.

Indeed, it didn’t.

It’s a given that the Reserve Bank will leave the official cash rate unchanged at 0.25 per cent on Wednesday.

But BNZ makes a good case for being sceptical about the Reserve Bank suddenly tipping a lot more money into quantitative easing, either.

Reserve Bank deputy governor Geoff Bascand didn’t appear to presage an increased pace to QE when he discussed banks’ performance in July.

Back in June, BNZ put the chances of an increase in the QE cap to $90b at just “one on three”.

The Reserve Bank’s existing QE programme is spread over a year, and since it has been purchasing government bonds at a slightly reduced rate of a little under $1b a week, having spent $22b so far, there seems no urgency to announce a higher cap on the programme.

The strength of house prices, and not just the sharemarket, is now starting to surprise.

That will fuel concerns that any acceleration of QE might spill out into an asset price bubble.

While the US dollar remains soft, the kiwi dollar has steadied and isn’t in any danger of setting any records against the Australian dollar (A$0.93), Euro (€0.56) or pound (£0.51).

More importantly, by the Reserve Bank’s own recent assessment there is no sign yet of a substantial tightening of bank credit, which would be the most obvious justification for stepping up QE now.

Rather, deputy governor Geoff Bascand appeared to emphasise the importance of not driving interest rates too low in a speech on banks’ performance last month.

Bascand warned that low interest rates were likely to be an “enduring challenge for the banking sector”.

“A prolonged period of low interest rates could pose significant challenges to banks’ business models and profitability,” he said.

When making monetary policy decisions, the Reserve Bank assesses “the adverse consequences of, say, lower interest rates, alongside the benefits for financial stability that may result from a quicker or stronger economic recovery”, he said.

Those don’t sound like the words of a central banker about to unleash a further round of monetary easing.

Against that, the Reserve Bank will share the widespread concern that the economy may face a bit of a cliff edge when the remains of the wage subsidy programme splutters to a stop next month.

It has become clearer since its last OCR statement that more of New Zealand’s trading partners may be having to content with Covid-19 for a very long time.

And the risk of new community transmission of the coronavirus would of course change everything.

The bank may not want to be seen to be sitting on its hands in the run-up to a period of extreme economic danger.

The tempting path might be for the Reserve Bank to simply forecast an extension of its QE programme in time, recognising the fairly safe assumption that it will still be dabbling in unconventional monetary policy beyond April.

It could attach a dollar figure to such an extension, but that could seem premature.

Much more than that? Perhaps don’t count on it.