The Reserve Bank has stepped in with measures to ensure "smooth market functioning" as volatility arising from the Covid-19 pandemic continues, but has stopped short of instituting a programme of large-scale government bond buying, or quantitative easing.
On Monday the central bank, in an emergency move, cut its official cash rate by 75 basis points, but dysfunction in the money and bond markets since then has been putting upward pressure on rates.
That means monetary conditions are tightening rather than loosening, as they should do.
In government bonds, yields have been rising since the start of the week - the reverse of what would normally be expected.
When bond prices fall, yields rise.
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March 2029 government bonds started the week at 1.04 per cent and traded on Thursday at 1.77 per cent, before easing to 1.56 per cent today.
In today's statement, the Reserve Bank said the financial system remained sound, with strong capital and liquidity buffers.
Assistant Governor Christian Hawkesby said the bank had implemented measures to provide additional support to domestic financial markets.
"We will ensure our operations make financial markets operate smoothly," Hawkesby said in a statement.
The bank had introduced a Term Auction Facility (TAF) to alleviate pressure in the funding markets.
TAF would give banks the ability to access term funding, with collateralised loans available out to a term of 12 months.
"Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets," Hawkesby said.
"The opening of the TAF will provide confidence that the Reserve Bank stands ready to support the market if needed," he said.
The moves follow a US5c drop in the kiwi dollar yesterday and complaints from banks that there had been a "perverse" tightening in local money conditions.
The Reserve Bank had been providing liquidity to the New Zealand government bond market to support market functioning.
"This is the first step from the Reserve Bank to address the market stresses that are out there," Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said.
"It should ensure that the banks have got good access to cash," he said.
Pepper said the measures should resolve stresses in funding at the short end of the market.
"It is helpful, but there are clearly still pressures throughout the yield curve.
"We would expect to see this resolved through a quantitative easing programme," he said.
"We don't think that this is far away."
Faced with the same problem, the Reserve Bank of Australia has moved to buy Australian Government securities and securities issued by the state and territory central borrowing authorities in the secondary market.
Ross Weston, senior portfolio manager at Kiwibank, said the Reserve Bank of NZ needed to do more.
"They say they have been providing liquidity to the NZ Government bond (NZGB) market, but really the market needs to see a firmer commitment across the curve for NZGB buying," he said.
Earlier today, ANZ Bank pointed to a "perverse tightening of financial conditions, with widespread market implications".
"This needs to be addressed with RBNZ intervention under its monetary policy implementation powers – urgently," ANZ said.
The Reserve Bank is providing liquidity in the FX swap market, to ensure this form of funding can be accessed at rates near the Official Cash Rate.
This activity will increase in the weeks ahead to support funding markets, it said.
The central bank had also established a temporary US dollar swap line with the US Federal Reserve.
"This will support the provision of USD liquidity to the New Zealand market, in an amount up to US$30 billion ($52.9b).
Overnight, the Fed also expanded its USD swap lines to nine additional countries, including New Zealand, for a combined total of US$450b.
Westpac chief economist Dominick Stephens said the Reserve Bank had stepped up with a range of measures to support financial markets and bank funding.
"These will keep short-term interest rates down, but more needs to be done to prevent long-term interest rates from rising unhelpfully," he said.
- Additional reporting, BusinessDesk