Reserve Bank expands cap on quantitative easing to $100 billion

Wednesday, 12 August 2020

Reserve Bank governor Adrian Orr emphasises “downside risk” to its forecasts.

The Reserve Bank has agreed to expand its cap on quantitative easing to $100 billion, pushing out the end date for QE by more than a year to June 2022.

The Reserve Bank previously had a $60b cap on the amount of money it would print to buy back government bonds by the original end date for its QE programme of May next year.

The new cap indicates the bank expects to keep buying back government bonds for a longer period, but not necessarily at a faster rate.

The Official Cash Rate (OCR) remains unchanged at 0.25 per cent.

The Reserve Bank made only a passing reference in its 2pm statement to the detection of Covid-19 in South Auckland on Tuesday.

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That development came after the key decisions of its monetary policy committee.

Reserve Bank governor Adrian Orr said it “finalised” its decisions on Wednesday, but the terms of its changed settings for QE – including the increase in its cap to $100b – had already been made.

A record of its meeting said New Zealand “had contained the local spread of the virus thereby enabling the relaxation of social restrictions”.

But in the pre-amble to its release, the Reserve Bank said “the return to social restrictions in New Zealand” showed any significant change in the global and domestic economic outlook remained dependent on the containment of the virus.

The decision to extend its QE programme appears to have instead been based on concerns about the knock-on effect of weakness in the international economy and a stronger New Zealand dollar.

Its monetary policy statement said it agreed that global uncertainty was “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,” it said.

The Reserve Bank said it would continue to prepare a package of “additional monetary instruments” to provide further monetary stimulus.

Those measures could include a negative OCR, the direct funding of retail bank lending, and purchases of foreign assets, it said.

But the bank said the deployment of such tools would depend on the outlook for inflation and employment.

ASB chief economist Nick Tuffley said the measures announced by the Reserve Bank would “help allay market concerns over where to for interest rates” after the previous QE programme expired in May and “re-emphasised” the bank’s commitment to ensure interest rates remain “very low”.

”The most recent Covid outbreak is an evolving event and it is too soon to say how much of an impact it will have on the economy, but it does reinforce the Reserve Bank’s view that the risks to economic growth are all skewed to the downside,” he said.

Orr said there was a “downside risk” to its base economic scenario.