RBNZ eyes unconventional options

Governor Adrian Orr says the Reserve Bank is considering unconventional monetary policy options more deeply. This could involve negative interest rates, or even printing money to buy bonds or to give as handouts to New Zealanders, Marc Daalder reports.

The Reserve Bank's announcement on Wednesday that it was cutting the Official Cash Rate (OCR) by 0.5 percent to one percent was met with surprise from economists. At a press conference after the decision went public, RBNZ Governor Adrian Orr responded to concern that the big cut left him little wiggle room for future cuts.

In response, Orr confirmed that the Reserve Bank is actively investigating the possibility of turning to unconventional measures like quantitative easing (inventing money to buy Government bonds and other assets) or a negative OCR.

"We are well-advanced on that work," he said. "We would be negligent not to do the work around how we might do negative interest rates, how we might do asset purchases, how we might do other forms of intervention."

Using such tools would mean the Reserve Bank would be engaging in a kind of quasi-fiscal policy. "Some of it is fiscal policy operated through a monetary institution," Orr said.

Economists have already urged the Government to do more on fiscal stimulus as monetary policy alone struggles to make a difference.

If it did go down this route, the Reserve Bank would not open up its processes to more public consultation or more formal collaboration with the Government or Parliament, Orr said. 

Stashing cash

Chief among the possibilities before the Reserve Bank is cutting the OCR to a negative level. Japan, Sweden, and much of the European Union are operating with negative interest rates and have been doing so for many years.

The New Zealand Initiative's Executive Director Oliver Hartwich wrote for Newsroom about this possibility. It could see banks charging customers interest on their deposits and lead either to increased spending - which would be ideal - or the hoarding of cash.

Negative interest rates also drive up asset prices, as people search for other ways in which to store their money. Hartwich wrote that German real estate "for decades was a haven of stability ... where nothing ever changed." Now, however, Germany is seeing a boom in house prices: Frankfurt's prices rose 15 percent last year, which was typical.

Moreover, negative interest rates might not be strong enough to lift the economy out of a potential recession.

Bill Rosenberg, the Council of Trade Unions' policy director and top economist, said such a strategy was possible but might not be enough.

"Just what effect that would have, whether it's effective enough to dig the country out of a recession, is the big question," he said.

Who benefits?

Orr also raised the possibility of engaging in quantitative easing, in which the Reserve Bank itself buys up assets - usually bonds of some form or another - in an attempt to stimulate growth.

Quantitative easing benefits people with assets and risks subsidising people who don't need a hand - and who, in the worst case scenario, would just pocket their savings instead of spending them. Rosenberg said QE has failed overseas.

"The problem with quantitative easing in the US and Europe is, in many cases, it hasn't reached the people who need it most. Even from the point of view of getting it to incentivise investment and encourage banks to lend to firms, it hasn't been particularly effective there either," he said.

Brad Olsen, a senior economist with Infometrics, agreed. "QE is worth investigating. We do have a rather shallow capital pool to draw from in New Zealand so it has limited effectiveness here," he said.

A more equitable measure would be so-called helicopter money. This would entail creating and distributing a set amount of money to every New Zealander, possibly on a regular basis. This would put cash in the pockets of people who need it - and who would be most likely to spend it.

"It's seen as novel these days, but in historical terms it's not at all unusual," said Rosenberg. "Prior to the neoliberal era ... the use of money creation was a common way to respond to downturns in the economy."

"It is worth investigating and it depends on what sort of transmission function you go through," Olsen said.

Working with the banks

A final proposal was raised in a Treasury report titled "Maintaining Living Standards Through an Economic Downturn". Alongside a negative OCR and QE, the report listed the possibility of targeted term lending. Under this scheme, the Reserve Bank would lend money to banks at a rate below the OCR, but with specific conditions on that money.

This would allow RBNZ to ensure money it lends to banks is used to fund business investment and recirculated into the economy.

"The reason I like that option more than all the others is that you can target it to the right sort of spending," Olsen said. 

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