The Reserve Bank is expected to announce a large expansion of its bond buying programme but hold its interest rate steady in its latest monetary policy statement this afternoon.
So far the RBNZ has bought about $10b worth of bonds, and has pumped another $1b through other specialised schemes in measures to support the economy. Photo: RNZ
The central bank has been at the forefront of measures to support the economy, banks, and markets, to counter the Covid-19 pandemic through a sharp cut to the official cash rate (OCR) by three quarters of a percentage point to 0.25 percent, the buying of government and local council bonds, and the backing of loans to businesses by retail banks.
ASB senior economist Mike Jones said the key issue was by how much the RBNZ increased its bond buying programme, otherwise known as quantitative easing (QE), currently set at $33 billion over the next 12 months.
"We believe the size of the programme could be lifted to $60b. We and the consensus expect the OCR to be left at 0.25 percent."
So far the RBNZ has bought about $10b worth of bonds, and has pumped another $1b through other specialised schemes.
The bond-buying programme has been aimed at not just putting money into the economy but also bringing down wholesale interest rates which at one stage were seen as unreasonably high.
"Rather than additional stimulus per se, the QE upsize is more akin to running to stand still," Jones said.
"The New Zealand government has massively increased its debt issuance plans as it continues to roll out fiscal support across the economy. Thus, the RBNZ needs to level up its QE buying to ensure this extra debt issuance doesn't lead to an unhelpful increase in wholesale interest rates, particularly at a time when the economy is so vulnerable."
The one issue the RBNZ is expected to skirt around is the prospect of negative interest rates.
Taking wholesale rates below zero has been used in other major economies such as Japan and Switzerland and the RBNZ has said it is an option in its tool kit.
Westpac chief economist Dominick Stephens said further measures to support the economy would be needed by the end of the year.
"We think more will be required later this year, and a negative OCR would be a natural next step."
But retail banks have signalled that their systems are not equipped at the moment to handle negative interest rates and, while there is some support in financial markets for the move, the RBNZ is expected to kick the issue to the sidelines for now at least.
