RBNZ Open to Increasing QE in ‘Rapidly Evolving Situation’

(Bloomberg) -- New Zealand’s central bank is open to increasing the size and scope of its asset-purchase program to boost stimulus as the coronavirus pandemic threatens to throw the economy into a deep recession.

“We’re in a rapidly evolving situation, the assessment of the economy in financial markets is moving very quickly, and that’s what we will have to take into account when we reconsider the size and nature of the program that we run,” Reserve Bank Assistant Governor Christian Hawkesby said in a telephone interview Wednesday in Wellington. “We are very open to changing the size of the program to an appropriate size given our assessment of the economic outlook.”

The New Zealand dollar fell on the comments and bond yields declined. The yield on April 2029 bonds fell to 1.07% from as high as 1.14% earlier Wednesday.

Just two weeks after announcing a NZ$30 billion ($18 billion) quantitative easing program that was considered huge at the time, the RBNZ is under pressure to do more to cap bond yields and ensure markets are functioning. Yesterday it added NZ$3 billion of Local Government Funding Agency debt to its QE slate and said its Monetary Policy Committee would reassess the program at the next policy meeting in May.

When the MPC met over the weekend to discuss LGFA, “we did not receive a full economic assessment of the outlook for inflation and employment, and we didn’t make a decision around the appropriate size of the total program,” Hawkesby said. He also said the RBNZ “didn’t know the exact size of Debt Management’s debt program before we announced our QE program originally.”

New Zealand Debt Management will offer a record NZ$17 billion of government bonds in the three months through June 30, threatening to drive up yields unless the RBNZ soaks up some of the additional supply.

At the same time, Hawkesby said “there’s a limit around the percentage of the bond market we could purchase without creating distortions or disruption.”

“We can’t be the total market ourselves,” he said. “There still needs to be a good, dispersed range of holders of these securities for markets to function properly.”

Purchase Limit

Asked what the appropriate percentage is, he said “in the order of 40 to 50% of individual issues.”

“The total program size is based on an assessment of the amount of stimulus that the economy requires,” Hawkesby said. “So when we come back in May as the Monetary Policy Committee and have a full economic assessment, then that will provide us with an indication of the total size of the program that’s appropriate.”

He noted that for central banks that had engaged in QE overseas, “their holdings do sit in that broad range of 40 to 50% as a limit.”

Hawkesby’s comments suggest a sizable increase in the QE program is possible when the MPC meets on May 13, said Nick Smyth, an interest rate strategist at Bank of New Zealand in Wellington. The nominal government bond market will be almost NZ$75 billion by June and could be more than NZ$100 billion by mid-2021 due to increased issuance, he said.

“Our best guess at this stage is that the MPC will increase its QE program size in just nominal government bonds to ‘up to’ NZ$50 billion,” Smyth said. “That would give RBNZ staff some leeway to buy that full amount, or less if it started to have a detrimental impact on liquidity and overall market function.”

Hawkesby said the RBNZ has considered adding other asset classes to its QE program and will continue to do so. He said inflation-indexed bonds weren’t considered at the latest MPC meeting, “but they remain on the list of potential asset classes that could be included in a broader program.”

He said RBNZ purchases of LGFA debt should support the broader corporate bond market.

‘Create Liquidity’

“It will free up space for intermediaries and fund managers who are selling us LGFA,” Hawkesby said. “That’s going to create liquidity such that they can switch or transfer into these other issuers in the corporate bond market that are smaller. So that’s a really key element of the way we think that our actions won’t just support the issuer who’s been added to the program but it will have benefits right across the corporate bond market.”

The RBNZ was “stepping up to the plate” and would “really like to see is the banks and intermediaries stepping up to provide market making, liquidity, price transparency to their clients in the corporate bond market and be part of that solution,” he said.

New Zealand is halfway through a four-week nationwide lockdown aimed at eradicating the coronavirus, which has brought the economy to a virtual standstill. Business confidence plunged to a record low this month, according to preliminary data released by ANZ Bank today.

Asked about cutting the official cash rate further below its current level of 0.25%, Hawkesby said banks weren’t operationally ready for negative rates and the RBNZ had given them an assurance that was off the table for the time being. However, the central bank was “open minded” about a negative OCR, he said.

“There could well be point down the track, where time passes, that we do have a negative official cash rate somewhere, sometime in the future.”

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