Wednesday 22nd April 2020
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Reserve Bank of New Zealand Governor Adrian Orr said he remains “open minded” about the direct monetization of government debt.
Whether direct or indirect, his central bank already looks on course to end up owning 27% of the South Pacific nation’s debt by the end of February, according to Bloomberg calculations.
The need for massive government spending to pull New Zealand’s economy through the coronavirus crisis, and a growing number of advocates for debt monetization around the world, make it a real possibility for the RBNZ. In the region, Indonesia has paved the way for the central bank to buy debt directly from the government, while the Reserve Bank of Australia has been at pains to emphasize that it is only buying bonds in the secondary market.
“Direct monetization, I know, has been heresy, taboo for a long time, but it’s only a long time in our lifetime,” Orr said on Tuesday. “It’s not a mysterious issue. It’s just not how we’ve run business.”
New Zealand’s Treasury has almost doubled debt issuance to NZ$25 billion ($15 billion) for the fiscal year ending June 30 and the RBNZ said last month that it would purchase as much as NZ$30 billion of bonds over the coming year.
“We’re under no illusion that this is to help fund the government’s spending,” said Hamish Pepper, a fixed-income and currency strategist at Harbour Asset Management Ltd. in Wellington. “As long as you can trust the monetary authority to still behave in their mandate, then you can digest the idea of central banks buying debt from governments.”
In theory, direct purchases risk sparking uncontrollable government spending, runaway inflation and a slump in bonds and the currency.
Yet New Zealand’s bonds have returned more than 6%, including currency gains, since the RBNZ announced bond purchase program on March 23.
The nation’s currency slipped 1.3% against the greenback on Tuesday as investors speculated that the RBNZ is preparing to step up stimulus at its May policy meeting.
Orr said direct debt monetization comes with “as many risks as opportunities” but that “you shouldn’t rule any option out.”
The RBNZ’s support for the bond market comes as foreign investors cut back their positions. Their ownership of New Zealand government securities fell to 49.9% last month, the lowest in 17 years, data showed on Tuesday. It was as high as 70% in 2015.
Note: Bloomberg’s calculation that the RBNZ will own 27% of government bonds assumes the central bank buys NZ$30 billion of debt by the end of February and that the Treasury sells NZ$25 billion of bonds in the fiscal year starting on July 1, the same amount as this fiscal year. The calculation excludes $3.3 billion worth of government bonds that the central bank already owned at the end of March 31, given they include debt with repurchase agreements to the market. The estimated ownership including these is 30%.
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