Tuesday 12th May 2020
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New Zealand’s central bank will mark the first anniversary of its new Monetary Policy Committee amid an unprecedented crisis, with policy makers under pressure to deliver massive additional stimulus.
The MPC is tipped to almost double the Reserve Bank’s quantitative easing program to as much as NZ$60 billion ($37 billion) and, having already slashed the official cash rate to 0.25%, will face scrutiny over whether to take it negative.
The coronavirus pandemic and a strict nationwide lockdown have sent New Zealand’s economy into freefall, with one of the steepest contractions ever seen expected in the second quarter. As the government ramps up borrowing to fund its rescue packages, economists say the RBNZ needs to increase its asset purchases to keep a lid on bond yields and should leave the door open to a negative OCR.
“The RBNZ needs to level-up its QE buying to ensure extra debt issuance doesn’t lead to an unhelpful increase in wholesale interest rates, particularly at a time when the economy is so vulnerable,” said Mike Jones, senior economist at ASB Bank in Auckland. “Our take is that QE remains the more effective policy tool, and that the RBNZ will keep it as its headline act for the meantime. But it needs to keep all of its options open in dealing with a shock as unprecedented as this one.”
The decision is due at 2 p.m. Wednesday in Wellington and Governor Adrian Orr will hold a press conference one hour later -- via the video conferencing platform Zoom. It’s a far cry from the orthodox conditions that prevailed when the MPC first assembled ahead of the May 2019 rate decision, when the OCR was still at 1.75%.
The committee of three external members alongside four RBNZ officials and a non-voting Treasury Department observer was formed to broaden the input into policy decisions and ensure greater transparency and accountability. Previously, the governor had sole responsibility for decision making.
The jury is out on whether these objectives have been achieved, largely because the new external members of the committee have remained silent in public.
While each rate decision is accompanied by a record of meeting that summarizes what was discussed, every decision so far has been made by consensus with no voting required. None of the external members has made a public comment or given an interview since being appointed, making it hard for economists to gauge what difference, if any, the enlarged committee has made.
“It’s very difficult to tell,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “We haven’t heard anything directly from the external members. The record of what they talked about has been quite useful, but in terms of the difference the external members have made to the decision-making process we just don’t know.”
An RBNZ spokesman said MPC members “each bring a range of expertise and experience to the table” and consensus is reached “after thorough, robust discussion.” The coronavirus pandemic interrupted plans for external members to give interviews, he said.
The committee was arguably slow to recognize the potential for the virus to develop into a global crisis.
On Feb. 12, it held the cash rate steady at 1% and surprised some by playing down the need for further stimulus even as early signs of the impact of Covid-19 on global travel and trade were emerging. But as the economic outlook rapidly deteriorated, it acted.
After an emergency meeting of the MPC, the RBNZ dropped the OCR by 75 basis points on March 16 and declared the benchmark would stay at 0.25% for the next 12 months.
Just a week later it took the historic leap to QE, announcing it would buy NZ$30 billion of government bonds over a year. Since then it has added NZ$3 billion of bonds issued on behalf of local governments to the program and indicated it’s open to doing more.
Economists are predicting the economy will contract as much as 22% in the second quarter and that it will be several years before it claws back to pre-Covid levels. The jobless rate is projected to rise to more than 10% later this year from 4.2% in the first quarter.
Zollner said the MPC “obviously underestimated” the impact of the virus but has been quick to make amends.
“They weren’t as quick off the mark with their emergency cuts as other central banks were but once they got going they certainly made up for lost time,” she said. “No one could accuse them of not being proactive now.”
Finance Minister Grant Robertson will unveil increased support for businesses and workers in his budget on May 14, which is expected to be accompanied by a big increase in the government’s bond issuance plans.
That may require a significant upsizing of the RBNZ’s bond purchases. BNZ strategist Nick Smyth predicts an increase to NZ$55 billion while ANZ, ASB and Westpac expect NZ$60 billion.
The central bank may also expand the scope of its purchases to include inflation-indexed bonds or even semi-government bonds issued by agencies like Housing New Zealand.
If further stimulus becomes necessary, Orr has said that negative interest rates are not off the table.
“In our assessment, a negative OCR is eventually going to have to be part of the mix,” said Dominick Stephens, chief New Zealand economist at Westpac in Auckland, who forecasts a drop to minus 0.5% by November. “A stark deterioration in the inflation and employment outlooks will necessitate a change of plan.”
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