At 8am this morning, the RBNZ cut the overnight cash rate to 0.25% (from 1%) and the US Fed cut rates to 0% and introduced a QE5 (Quantitative Easing) package of US$500 billion in Treasuries and $200 billion in Mortgage-Backed Securities. For comparison, the first package of QE in 2008 was US$600 billion.

Starting with the RBNZ, this (up until the Fed announcement) was quite a big move, however this is the central bank that has shown an interest in getting ahead of the market (based on its 0.5% cut last year). It has also given forward guidance that the rate will stay at this level for “at least the next 12 months”.

Looking ahead, the RBNZ has previously expressed the view that it could go into slightly negative territory (so it still has potential cuts left). However, the statement today noted it believes a large-scale government bond purchase programme would be more effective than further rate cuts.

The effectiveness of an RBNZ QE programme is still a bit of a question mark – there isn’t a great deal of downside left on interest rates with a 10-year yield of 1%. The other consideration is the high level of foreign ownership of government bonds, and the small corporate bond market. This combination means that a QE package may have the most effectiveness through further depreciation of the NZ dollar.

Moving to the Fed – the market has reacted negatively with US futures falling (hitting is lower limit), despite the scale of its announced measures.

Looking ahead, the Fed has basically used all its available ammunition now. The baton has been, and will continue to be, passed to fiscal policy to provide support now.

For ongoing updates please refer to the daily blog on the Russell Investments NZ website. The link is shown below.

More >