Wednesday, 13 May 2020

More support in difficult times

Highlights for me of today's Monetary Policy Statement:

  • The official cash rate will likely be held at 0.25% "until early 2021" (p4). An eventual negative OCR isn't totally off the table, however: "If further stimulus is deemed necessary, additional options include ... setting a negative OCR" (p19)
  • The bank aims to keep longer-term interest rates low by expanding its programme of bond buying -  the limit on its "large scale asset purchases", or LSAP,  will be nearly doubled to $60 billion. What caused what, and how much, isn't clear but net net, between the LSAP and everything else going on, longer term yields have moved significantly lower, and appropriately so, as shown below (from p18)

  • The job of getting inflation to 2% or so is even harder now: "the economic impacts of the COVID-19 outbreak will reduce inflation significantly ...  Overall, CPI inflation is likely to be much lower by the end of this year, possibly below the 1 to 3 percent target range" (p8)
  • It would help if the exchange rate was a good deal lower, but paradoxically we're looking relatively good by international standards, so people aren't actually that keen on selling it: "New Zealand remains in a relatively positive position given its relatively low number of COVID-19 cases, the relatively moderate declines in its export prices so far, and its strong fiscal position" (p7)
  • The bank's expecting a big fiscal boost of around $30 billion on top of the $20 billion or so already committed (p8), most of which is the wage subsidy ($12 billion) and tax relief ($5.9 billion)
  • The RBNZ is getting restive about lower wholesale interest rates not flowing through to retail level: "We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers. It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme (p2). Not enough has happened up to now - "So far, we have not observed the pass through of wholesale interest rate reductions to retail interest rates to the extent we might expect in normal times" (p19) - and there have been reasons for that - "This likely reflects a number of factors, including strong competition for deposits as market funding conditions deteriorated" (p19) - but we need to move on: "As the economy comes out of lockdown, we expect a lift in lending market activity and increased competition from banks to put downward pressure on lending rates" (p19). The bank has made it easier for banks to fund at (cheaper) wholesale rates than from depositors, and as a result "We expect our recent monetary policy easing to pass through more fully to bank funding costs and lending rates in the near future, and will be closely monitoring movements in retail interest rates and bank margins" (p23)
  • The economic outlook is very difficult. No-one can do better in current conditions than sketch out some possible scenarios: here are the bank's (p10).You'll note that its baseline is relatively optimistic, and things could go worse. Even on the baseline view, it will be late 2021 or early 2022 before we're back to where we were pre-covid. The immediate outlook is for a 2.4% fall in GDP in the March quarter and a 21.8% fall in GDP in the June quarter, followed by a 23.8% rebound in the September quarter. The cumulative effect of those three is a 5.5% decline, which will take some time to claw back.

One thing that's occurred to me (and occurred to Bernard Hickey of Newsroom in the post-Statement media conference, too) is that I wonder why we don't do what the Reserve Bank of Australia does, and simply announce a target level for one or more long term interest rates: in the RBA's case, an 0.25% target for three-year Australian government bonds. The Bank of Japan has had a long-standing 0% target for the 10 year Japanese government bond. Adrian Orr's response was, as I understood it, to the general effect that the RBNZ didn't have enough control over the market to steer towards something precise. I dunno: at the end of the day, we're not especially interested in whether the LSAP programme is $60 billion or $40 billion or $100 billion. What we actually want is the outcome of at worst stable bond yields (despite the expected flood of new issuance) and ideally lower again. Why not cut out the focus on the middle-man process and cut to the chase of the desired outcome?

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