Reserve Bank Governor Adrian Orr has announced another massive easing of monetary policy in response to the global Covid-19 economic shock.
Orr said the bank’s Monetary Policy Committee had agreed to increase the bank’s Large Scale Asset Purchase (LSAP) programme potential to $60 billion from the $33 billion limit agreed in March. He said the programme, which is often called Quantitative Easing (QE), would also expand to include Government Inflation indexed bonds, having already included Local Government Funding Agency bonds. But it does not include Kainga Ora or other semi-government or corporate 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. 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,” the Reserve Bank said.
“The expansion to the LSAP programme aims to continue to reduce the cost of borrowing quickly and sharply. This is preferable to delivering a smaller amount of stimulus now, only to risk later realising more should have been done,” it said.
“We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers. It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme.”
The initial $30b QE programme was announced on Monday March 23, shortly before the announcement of the Level 4 lockdown. It was expanded to include up to $3b of Local Government bonds on April 7.
The Reserve Bank said the Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March that it would stay there for a year, in part because some bank computer systems can’t handle negative interest rates.
Deputy Governor Geoff Bascand told a news conference the bank expected the banks to be ready to handle negative interest rates by the end of calendar 2020.
“The Monetary Policy Committee is prepared to use additional monetary policy tools if and when needed, including reducing the OCR further, adding other types of assets to the LSAP programme, and providing fixed term loans to banks,” the bank said.
Some critics of QE programmes over the last decade have said the policy is effectively stimulus for asset holders (the rich) that does not trickle down to the poor, because banks have not lent much to businesses for job creation and poorer citizens do not have borrowings to benefit from lower interest rates, or their borrowings are at much higher consumer lending rates.
The Reserve Bank said the Monetary Policy Committee was pleased that both wholesale and retail interest rates have fallen. The functioning of markets has also improved – a secondary goal of the LSAP programme.
“Further declines in retail interest rates would be needed to fully deliver the stimulus. The Committee noted that long-term interest rates in the government bond market are also sensitive to a number of factors outside the LSAP programme, including bond issuance and foreign bond yields,” the bank said.
