Another RBNZ Quantitative Easing Program?

RBNZ Assistant Governor Details Five Unconventional Monetary Policies For Further Crises

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While the New Zealand Dollar has been out of the limelight over recent months given the tide of hawkishness sweeping across central banks elsewhere in the G10 bloc, focus was once again on the antipodean currency yesterday.

Speaking during an interview with a domestic broadcaster, RBNZ assistant governor John McDermott caught the market offside as he noted the central bank’s willingness to engage in high level asset purchases if necessary, should another major financial crisis take place. So essentially, McDermott is referring to another RBNZ quantitative easing program.

RBNZ White Paper

The comments come on the back of a release of a research paper by the RBNZ highlighting the five options the bank has identified for dealing with any major economic shock, including quantitative easing. The paper basically highlights five unconventional policy approaches that the bank is willing to employ and is meant to reassure markets with the paper clearly stating that “there is no need to introduce unconventional monetary policies in New Zealand at this time”.

The bank was also keen to highlight that unlike other central banks such as the ECB, BOJ and the Fed, in the wake of the global financial crisis, the RBNZ didn’t need to resort to unconventional monetary policies to shore up the economy.

However, since the inflation has been persistently low and has dogged the economic outlook in the country and the traditional methods used by the bank so far, have been unable to get inflation back to target, which has raised concerns about how the bank would be able to deal with another financial markets shock. So, is another RBNZ quantitative easing program on the cards?

Commenting on the paper, McDermott said “this is all about planning for the future” and while there is “no imminent prospect” of needing to employ any of these strategies, “the probability of needing them at this point in the cycle is higher than it ever was in history” and consequently, “it would be silly of us not to be ready just in case”.

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The five unconventional policies detailed by the RBNZ are as follows:

  1. Negative interest rates, with the bank willing to go as low as -0.75%
  2. Forward guidance, with the RBNZ making stronger moves to signal its intentions.
  3. QE: the RBNZ says it would consider large scale asset purchases including government and corporate bonds on the secondary market alongside potentially purchasing foreign bonds too. E.g. Another RBNZ quantitative easing program.
  4. Interest rate swaps. The RBNZ said it could use this method to influence broader rates
  5. Term lending facilities for banks. The RBNZ said it could lend to banks to guarantee them liquidity, against collateral

Elaborating on the options proposed, McDermott said that foreign experience suggests that the lower limit for the policy rate was around -0.75%, though he indicated a more likely level of -0.5% saying that having rates so low for too long would be detrimental o the health of the economy.

Referring to forward guidance, McDermott said that the bank is “well practised” though said that it would need to back up its commitments with asset purchases. In terms of asset purchases, McDermott said that the scale of government and corporate bond purchases would likely be limited to the relatively small size of the country’s financial markets. Consequently, the RBNZ could look to purchases bonds overseas with the intention of weakening the New Zealand Dollar.

As the country’s interest rate swaps market is relatively large and liquid, McDermott said that this channel could be used to influence broader interest rates without facing the same constraints as it would through bond purchases. Finally, McDermott said that offering banks loans against collateral could be an effective way to ensure liquidity doesn’t dry up and to ensure that borrowing costs stay low.

Technical Perspective

Technical View of the likelihood of Another RBNZ Quantitative Easing Program

For now, NZDUSD remains trapped within the broad .67/68 – .74/.75 range which has framed price action over the last two years. Price is currently sitting on the rising. Price recently broke down through the long term rising trend line from 2015 lows, suggesting further downside might be coming.

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