NZIER’s Shadow Board continues to favour further QE over a negative OCR

22 June 2020

New Zealand Institute of Economic Research (Inc)
Media release
For release 10am Monday 22 June 2020

There remains a wide range of views amongst the Shadow Board on whether more monetary policy stimulus is required, and in what form. Overall, the consensus amongst the Shadow Board is that more stimulus would be required over the next twelve months, with the majority favouring an expansion of the Reserve Bank’s quantitative easing programme.

There was little support amongst the Shadow Board for the OCR going into negative territory at the upcoming meeting, although some members thought such a move would be required over the coming year. Members noted a negative OCR was unlikely to be effective in stimulating the economy, while highlighting the risks which include encouraging people to save more in order to achieve their savings goals (thus reducing spending) and reducing business confidence.

When it comes to the quantitative easing programme, most Shadow Board members felt an expansion of the programme was appropriate. Some members also advocated the Reserve Bank expand bond purchases to include council and Housing NZ debt. Increasing its asset purchase programme was generally seen as a more effective way for the Reserve Bank to support the Government in stimulating the economy.

Figure 1 Shadow Board still think it’s appropriate to inject more stimulus

(% strength of policy preference on what the RBNZ should do for each monetary policy tool)

Source: NZIER Monetary Policy Shadow Board

Figure 2 Individual participants’ recommended rate settings – 17 June 2020

Source: NZIER Monetary Policy Shadow Board

Table 1 Participant comments

Participant comments are optional

Stephen Toplis We do not believe negative interest rates are the appropriate tool to use when the economy is facing equity not debt concerns. We would only advocate negative interest rates in the event the economy looked to be entering a period of protracted economic decline. Ideally, the RBNZ will, eventually, be able to accelerate recent tapering and allow the Government to fund itself without support.
Viv Hall No evidence that an OCR of 0.25% is a material constraint to improved real GDP and employment growth. Some exchange rate appreciation and low oil prices are not sufficient to justify a negative OCR. Expansion of the QE program should be guided by the need to ensure smooth functioning of financial markets and appropriate liquidity in the financial system.
Dominick Stephens Tentative recent data suggests that the Covid recession may not be quite as severe as previously anticipated. However, the rising exchange rate will keep inflation suppressed, so the RBNZ still has a big job ahead of it. In order to keep buying bonds at $1bn per week, the RBNZ will have to expand the cap on the bond purchase programme at some point.
Prasannai Gai No comment.
Kirk Hope No comment.
Jarrod Kerr

I believe an expansion of the LSAP program, and term lending to banks, would be far more effective in lowering retail deposit and lending rates, if required. I’m not an advocate of negative rate policy. I believe the risks to the system are unnecessary, and savings would actually increase.

I believe the QE program ‘should’ be expanded to include council (and housing NZ) debt beyond just LGFA. Nominal NZDMO issuance will lift to $213bn over the next 5 years. The RBNZ has the capacity to take down 50% of NZGBs alone. Add in council debt, and the program could double from 60bn to ~120bn.

Ingrid Cronin-Knight

Based on a range of performance data for New Zealand’s SME community, MYOB's view remains that the economy will need significant ongoing stimulus, particularly in the coming months as the Wage Subsidy Scheme is completed.

Given the negative impact on SME confidence of record low interest rates, and the likelihood that negative interest rates would increase that effect, our preference would be to see the RBNZ focus on further expansion of its QE programme, as required.

Kerry Gupwell A lot has already been promised in terms of “government funding” which is positive and there has been a significant reduction in the OCR, and more will be required of both. The concern is execution, yet again. I feel that an opportunity may have been lost as the government has “held some back” in reserve – for what? The funding has to hit the road now to boost jobs and the economy but has momentum and a cohesive approach been lost as we head into an election - it seems that electioneering has already started, at what cost? Our economic response needs to be as robust as our health response (to COVID).
Arthur Grimes No comment.

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Christina Leung, Principal Economist & Head of Membership Services, 021 992 985