Reserve Bank dials back QE spend to $200m after big GDP forecasting miss

Friday, 18 June 2021

Economic turbulence in the wake of Covid has tripped up the Reserve Bank.

The Reserve Bank has further cut back its dwindling weekly spending on ‘quantitative easing” after GDP data showed it had severely underestimated the strength of the economy.

The bank has so far spent about $52 billion buying back central and local government bonds under its ‘QE’ programme, which is capped at $100b and designed to depress longer-term interest rates.

But its weekly spending on QE has stepped down from $350m to $250m and then to $220m over the past three weeks as expectations of a faster economic recovery from Covid have increased and the pipeline of bonds to buy has shrunk.

Next week, the bank is expecting to spend only $200m on the programme.

What does the official cash rate mean?

* Reserve Bank versus the markets: what a defeat could look like

* Rosier outlook may trim $100b QE programme, says BNZ

The Reserve Bank has downplayed the significance of its weekly QE budget, saying weekly changes in purchases do not represent a change in its monetary policy stance.

But in March it increased its spending amid a spike in bond yields and concerns about inflation, which implied a link with the shifting sands of monetary conditions.

Infometrics economist Brad Olsen said the trend was now for a downward shift in spending on QE.

“Absent anything wild in the market, it would seem likely that a slower and softer profile of purchases will continue,” he said.

The Reserve Bank declined say whether its big miss this week estimating how quickly the economy grew earlier this year could influence the way it develops future forecasts.

The bank estimated on May 21 that GDP shrank by 0.6 per cent in the three months to the end of March, but Stats NZ reported the actual figure as 1.6 per cent growth on Thursday.

Although, the GDP figure came in above all expectations, the commercial banks and other analysts ended up much closer to the mark, estimating growth of between 0.5 per cent and 1 per cent.

The Treasury had estimated a 0.2 per cent GDP decline in the Budget in May, though its forecast had been written significantly earlier than the Reserve Bank’s estimate, on April 1.

The Reserve Bank sets interest rates based on a forward-looking view of where the economy is tracking.

Spokesman James Weir said the central bank would not explain why the Reserve Bank thought its GDP forecast came to be out by more than 2 per cent, which is believed to be a record margin.

“The Reserve Bank has a long-standing policy of not commenting on new economic data as it comes out, because it could be interpreted as giving a view on monetary policy,” he said.

Nor would it comment on how important its GDP estimates were in determining its monetary policy settings, or whether the miss had any implications for future forecasting.

Olsen came to the defence of the Reserve Bank, saying that at the time it made its forecast, bank economists were more pessimistic than they were more shortly ahead of the release.

“We were all expecting a softer quarter. It wasn’t until we got some indicators coming in over the last four weeks that strength in activity became clearer,” he said.

The GDP figure has prompted banks to review their assumptions of when the Official Cash Rate will rise from its current level of 0.25 per cent, with ANZ now forecasting a rate-rise in February.