Thursday 19th March 2020
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New Zealand’s central bank may need to make the historic leap to quantitative easing sooner than it expected as financial markets become increasingly stressed and dysfunctional.
There are signs that the Reserve Bank’s official cash rate, which it slashed to 0.25% in an emergency move on March 16, is not being properly transmitted. New Zealand’s 90-day bank bill rate, which should closely track the OCR, has risen to 0.69%, opening the biggest gap between the two since 2014.
“There is growing risk that the RBNZ announces a QE program imminently, to restore market function and the transmission of monetary policy,” said Nick Smyth, a rate strategist at Bank of New Zealand in Wellington. “The credit market, even for high-grade bonds, is extremely strained.”
When it cut rates on Monday, the RBNZ said it would turn to large-scale asset purchases if further stimulus was required. The RBNZ’s Chief Economist Yuong Ha told Bloomberg in an interview the same day he wanted a QE program on the table for consideration by the next monetary policy meeting in May. However, events are unfolding rapidly as markets are roiled by the coronavirus crisis sweeping the globe. New Zealand bond yields have jumped amid the turmoil.
“Who would have thought, it’s been about 75 hours since the RBNZ cut the cash rate and already we’ve seen the market slip into a liquidity vacuum,” said David Croy, rate strategist at ANZ Bank New Zealand in Wellington. “We’re borderline dysfunctional here.”
The government this week announced its intention to issue more bonds to fund its NZ$12.1 billion ($7 billion) fiscal stimulus package. The prospect of more supply has helped to push yields higher. Yields should fall if the RBNZ were to signal it will start buying bonds and mopping up the additional supply.
“The Reserve Bank needs to signal its willingness to do QE at a scale that will support the government’s fiscal package as early as possible and needs to start buying them perhaps as soon as next week,” said John McDermott, a former RBNZ Assistant Governor who now heads the Motu economic think tank.
Westpac Head of New Zealand Strategy Imre Speizer also said in a note to clients this morning he expects the RBNZ “to embark on QE, causing longer maturity yields to eventually fall, resulting in a flatter yield curve.”
Croy said a RBNZ QE program would need to be at least NZ$15-20 billion to be effective. Smyth said NZ$10 billion would be the minimum size, “but the risks are skewed to more.”
In his Monday interview with Bloomberg, Ha said while the central bank still has work to do on a QE program, it conducts asset purchases routinely for balance sheet management. “So it’s not a big material jump to go from what we do day to day to scaling up to something more significant,” he said.
Australia’s central bank, which is expected to launch its own version of QE later today, has in recent days been injecting record amounts of cash into its financial system in an attempt to alleviate stress.
Smyth said the RBNZ could also take additional steps to ease market strains, such as reactivating the Term Lending Facility, while Croy said the central bank has broad scope to intervene in markets in order to implement monetary policy.
“The RBNZ frequently transacts with the market in FX swaps and this power could be used to intervene in the New Zealand government bond market to restore smooth functioning in the wake of the recent blowout in yields that is threatening to undermine monetary policy settings,” he said. In an emailed statement, the RBNZ said it is aware of and monitoring current market developments.
“These are not unanticipated or unusual given the nature of the global event, and recent Government announcements on fiscal policy in New Zealand and overseas,” it said. “We are in close contact with Treasury and other market participants.”
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