The RBNZ details its approach to the use of unconventional monetary policy tools.
Today RBNZ Governor Orr delivered a speech detailing the RBNZ’s approach to the use of ‘unconventional’ monetary policy tools. The speech was fairly high-level, with more technical details about each tool expected to be published in the coming weeks, and was broadly in line with our own assessment which we published last year.
Our view remains that unconventional measures will not be needed in New Zealand during the current cycle. However, with the OCR already not far from zero, it’s appropriate for the RBNZ to prepare its options for dealing with the next major downturn.
While the RBNZ had emphasised that the speech would not reflect on current conditions or monetary policy decisions, there were nevertheless some comments that were clearly aimed at quelling market speculation about a ‘panic’ response to the Covid-19 outbreak. The speech noted that: “We need to be considered and realistic as to how effective any potential change in the level of the OCR will be in buffering the New Zealand economy from shocks such as a lack of rainfall and the onset of a virus.” It also reiterated that the next scheduled OCR review is on the 25th of March.
The speech noted that if further monetary easing proves necessary, the menu of options would be:
- Further OCR cuts, up to the point that they become ineffective – a point that could be mildly negative.
- Forward guidance about the expected future path of interest rates.
- Intervention in the interest rate swaps market.
- Large-scale asset purchases, such as buying government bonds.
- Foreign asset purchases (which would constitute exchange rate intervention).
- Providing long-term funding to banks.
While the speech noted that this ranking may not reflect the RBNZ’s final preferences, we can take it as indicative. In short, the RBNZ prefers measures that work by influencing interest rates over those that increase the volume of money in the financial system (and create a risk exposure on the Crown’s balance sheet).
The RBNZ’s preferences differ in some respects to other central banks. For instance, the Reserve Bank of Australia has said that it views 0.25% as the effective lower bound for the cash rate – that is, the point at which further cuts would not be passed on to bank lending and deposit rates. In contrast, the RBNZ believes that the cash rate can go mildly negative before this option is exhausted. (How negative was not specified, but we estimate it to be as low as -1%.)
Entering the interest rate swaps market is not an option that other central banks have explored, to our knowledge. However, it reflects the makeup of New Zealand’s financial markets, where the swaps market is more active than the government bond market and tends to act as the benchmark for other long-term interest rates.
