Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
The Reserve Bank (RBNZ) has expanded its Quantitative Easing programme to up to $100 billion to further lower retail interest rates.
The RBNZ left the official cash rate unchanged at 0.25 in today's Monetary Policy Statement.
But the monetary policy committee agreed to expand the Quantitative Easing (QE) programme - sometimes dubbed "printing money" - from a previous limit of $60b.
It has extended the length of the programme to June 2022.
In the currency market, the bank's comments on the exchange rate, plus the possibility of negative interest rates at some point in the future, saw the New Zealand dollar fall by about 25 basis points to US65.50c.
Today's RBNZ decision and statement were more dovish than expected. A larger-than-expected increase in the Large-Scale Asset Purchase (LSAP) programme to $100bn from $60bn and emphasis on additional monetary policy support tools offset less negative economic forecasts.
The prospect of increased buying in the bond market saw the yield on the benchmark 10 year bond drop by 5 basis points to 0.73 per cent. When bond prices rally, yields fall.
2-year interest rate swap rates fell 5bp, 10-year government bond yields dropped 3bp.
The kiwi dollar was largely unmoved versus the AUD, perhaps reflecting the downplaying of foreign asset purchases (aka. FX intervention) as a preference among the remaining tools, a reference to the higher TWI reflecting well supported export commodity prices and forecasts for the TWI to remain close to current levels.
The economic forecasts were more positive but the assumption of a slight appreciation and then flat NZD (vs. depreciation in May forecasts), reduces inflation pressure such that the unconstrained OCR path was broadly unchanged.
The move reflected ongoing pandemic uncertainty, as highlighted by New Zealand's fresh lockdown, Governor Adrian Orr said.
"Any significant change in the global and domestic economic outlook remains dependent on the containment of the virus, which is highly uncertain as evidenced today by the return to social restrictions in New Zealand," he said in the statement.
"Such uncertainty is stifling household and business spending appetites, as highlighted in confidence surveys. Given the ongoing health uncertainty, there remains a downside risk to our baseline economic scenario."
"International border restrictions will continue to significantly curtail migration and tourism, and lead to the activity outlook being uneven across industries and regions."
"Commodity prices for New Zealand's exports remain robust, but this has been partly offset by a rise in the New Zealand dollar exchange rate moderating the return to local export producers."
Prior to the fresh lockdown economists say the key decision as being whether to increase the scale of the bond buying (quantitative easing) programme - currently capped at $60 billion.
That programme has so far managed to keep rates low, taking pressure off local credit markets by guaranteeing a buyer for bonds the Government has issued to fund pandemic support measures.
The RBNZ Committee agreed that any future move to a lower or negative OCR - if complemented by a Funding for Lending Programme - could provide an effective way to deliver monetary stimulus in addition to the expanded LSAP if needed.
What is QE?
Quantitative easing (QE) is a tool that central banks use to inject cash into the economy when other measures - like cutting interest rates - reach their limit.
How does it work?
The bank creates the funds to buy government bonds on the secondary market. This puts cash into the financial system. Its role as large-scale buyer puts a cap on government bond yields debt and reassures markets when they are stressed and interest rates spike.
Why now?
The RBNZ has already cut rates as low as it practically can for now, leaving QE as its preferred next tool.
With trillions of dollars worth of bonds issued to fund stimulus globally markets were stretched and rates were rising on NZ government bonds.
The RBNZ has acted to put downward pressure on those rates and to help cushion the economy and facilitate the issue of more government bonds to get us through the crisis.
How much?
The move to expand the QE limit to $100b over the next two years is huge and is bigger than markets anticipated.
For too long, ‘accident’ has been a blanket term that absolves responsibility.