InvestNow News – 8th May – Harbour – Will RBNZ QE help bridge the gap and how does it work?
Hamish Pepper – May 6, 2020
What is the Reserve Bank of New Zealand’s (RBNZ’s) Quantitative Easing (QE) programme?
After cutting the Official Cash Rate (OCR) by 75bp to 0.25% on March 16th, the RBNZ launched its Large Scale Asset Purchase (LSAP), or QE programme, just one week later. LSAP has a target to buy $30bn of government bonds over the next year; equivalent to 10% of Gross Domestic Product (GDP) and, at the time, almost 50% of outstanding bonds making it a large programme by global standards. The RBNZ also recently announced that it would buy $3bn of Local Government Funding Agency (LGFA) bonds, representing about 30% of outstanding bonds.
What is the RBNZ trying to achieve?
COVID-19 containment measures have dramatically reduced economic activity and, with conventional policy (i.e. OCR cuts) reaching its limit, QE can provide additional help by lowering long-term interest rates, weakening the exchange rate and, in some cases, improving market liquidity.
How much of this can RBNZ do?
The RBNZ has recently noted that, from global experience, buying 40-50% of outstanding bonds is the limit. Beyond this, disruption to market functioning may occur. Additional fiscal stimulus in New Zealand, and the associated higher pace of bond issuance, will likely see the government bond market grow to a larger size than the RBNZ initially estimated – allowing the QE programme to be expanded by as much as $30bn.
But where does the money come from to pay for the bonds?
The money is digitally ‘printed’, with the RBNZ creating additional reserves, increasing the money supply and the size of its balance sheet. Effectively, the RBNZ buys government bonds or other bonds in the market, and “pays” for those by adding digital money to the relevant bank or financial institution settlement account with the RBNZ.
Isn’t that inflationary?
Perhaps in the medium-term, but that is exactly what is needed right now given the large amount of excess economic capacity and associated disinflationary pressure that COVID-19 lockdowns here and globally have created. New Zealand’s unemployment rate, for example, is likely to more than double, reaching close to 10%.