The RBNZ plans to purchase up to $30bn of government bonds over the next year, to soften the impact of the Covid-19 outbreak and keep longer-term interest rates under control.
First Impressions: RBNZ begins large-scale government bond purchases
This morning the Reserve Bank of New Zealand announced that it will begin large-scale purchases of government bonds, with an aim of up to $30bn across a range of maturities over the next 12 months.
This is a necessary move, and one that we predicted would happen in short order. The response to the Covid-19 outbreak has escalated further in recent days, pointing to an even more severe impact on economic activity. On top of this, dysfunction in the bond market has actually seen a rise in longer-term interest rates since the RBNZ’s 75bp OCR cut last Monday, hindering its pass-through to retail interest rates.
The RBNZ noted that “a $30 billion LSAP program reflected a current assessment of the maximum effective stimulus achievable while maintaining a well-functioning government bond market”. A $30bn program represents about half of the government bonds that are currently available in the market (excluding inflation-linked bonds). But issuance will be ramping up significantly to fund the $12bn support package that the Government announced last week, and it’s likely that government spending will have to be expanded further. We think that the RBNZ will end up holding about a third of bonds on issue after 12 months.
At around 10% of annual GDP, the program is similar in size to the quantitative easing programs that other countries announced during the Global Financial Crisis, which were effective in bringing longer-term interest rates down. This does not change our forecast of a 3.1% decline in GDP. Rather, it was a necessary step to prevent an even worse outcome.
RBNZ statement:
The Monetary Policy Committee (MPC) has decided to implement a Large Scale Asset Purchase programme (LSAP) of New Zealand government bonds.
The negative economic implications of the coronavirus outbreak have continued to intensify. The Committee agreed that further monetary stimulus is needed to meet its inflation and employment objectives.
Globally, the number of people infected with the virus has increased rapidly and measures to contain the outbreak have become more restrictive. Global trade and travel, and business and consumer spending have been curtailed significantly.
The severity of the impacts on the New Zealand economy has increased. Weaker global activity is affecting the economy through a range of channels, not just reduced trade. Domestic measures to contain the outbreak of the virus are also reducing economic activity. Employment and inflation are expected to fall relative to their targets in the near term.
In addition, financial conditions have tightened unnecessarily over the past week, reducing the impact of the low OCR on achieving the MPC’s mandate. Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding.
The Committee has decided to implement a LSAP programme of New Zealand government bonds. The programme will purchase up to $30 billion of New Zealand government bonds, across a range of maturities, in the secondary market over the next 12 months. The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low.
The Committee will monitor the effectiveness of the programme and make adjustments and additions if needed. The low OCR, lower long-term interest rates, and the fiscal stimulus recently announced together provide considerable support to the economy through this challenging period.
