Economy

RBNZ now ready for Quantitative Easing

The Reserve Bank has slashed the Official Cash Rate by 75 basis points to 0.25 percent for at least a year and says that is as low it can go before it has to start buying Government bonds. Bernard Hickey reports.

This is our version of 'shock and awe' and 'whatever it takes,' although the Reserve Bank has also quietly set up the 'Big Bazooka' of Quantitative Easing to essentially print money to fund Government spending and investing.

Reserve Bank Governor Adrian Orr announced an unscheduled emergency cut in the Official Cash Rate this morning of 75 basis points to 0.25 percent and said that was as low as it could go before the bank had to start buying Government bonds in a 'large scale asset programme' to keep longer term interest rates low.

Economists and markets had expected a 50 basis point cut, with the outside chance of a 75 basis point cut. The comments about Quantitative Easing are the strongest yet about how our Reserve Bank can still stimulate the economy when interest rates are at or nearly zero percent.

The next official cash rate decision was not due until next Wednesday. The New Zealand dollar fell to an 11 year low of 59.61 this morning after the cut, which was the biggest since the 150 basis point cut to 3.5 percent on January 29, 2009. That followed a 150 basis point cut on December 4, 2008.

The Reserve Bank said the negative impact of the Covid-19 crisis would be significant.

"Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve. Several factors will continue to assist and support economic activity in New Zealand," the bank said.

"The Government is operating an expansionary fiscal policy and has imminent intentions to increase its support with a fiscal package to provide both targeted and broad-based economic stimulus," it said, also pointing to the sharp fall in the New Zealand dollar in recent days.

The bank said it had a special meeting of the Monetary Policy Committee yesterday afternoon.

"The Secretary to the Treasury outlined the broad scale of intended fiscal policy measures in light of the deteriorating economic outlook," the Reserve Bank said.

Prime Minister Jacinda Ardern and Finance Minister Grant Robertson are expected to signal a fiscal package worth more than $12b later today, with details due tomorrow.

Negative OCR ruled out

The Reserve Bank considered either a 50 basis point cut, or a 75 basis point cut, and staff also advised "that an OCR of 0.25 percent was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates."

This is new, as last year the Reserve Bank said it was considering negative interest rates.

The use of forward guidance was also new.

"Members agreed to provide forward guidance that the OCR would stay at the level of 0.25 percent for at least 12 months. This guidance would also provide clarity to financial market participants that a negative OCR would not be implemented over this period," it said.

"The Committee was also briefed by staff on additional monetary tools, and which were likely best suited to providing additional stimulus, noting that the recently published principles recognise the best tool depends on the particular circumstances.

"Assuming markets are functioning effectively, staff indicated Large Scale Asset Purchases of New Zealand Government bonds were the next best monetary tool available to the Committee. The Committee agreed with this assessment. However, the Committee agreed that additional tools were not needed at this point."

A key question will be whether the bonds are bought off banks and pension funds in the secondary market, or whether they are purchased directly.

Governor Adrian Orr is scheduled to hold a news conference to discuss the decision at 11 am.

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