Reserve Bank Deputy Governor Geoff Bascand says the central bank's bond buying efforts have so far been effective in reducing wholesale interest rates, but that they were not translating quickly enough into lower mortgage rates.
The central bank's first attempt to soften the economic blow of the Covid-19 pandemic was to cut its official cash rate by 75 basis points to a record low of just 0.25 per cent on March 16.
A week later, it announced a $30 billion quantitative easing (QE), or bond buying programme, to ensure that bond yields stayed low, thereby keeping bank borrowing costs down.
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Last week, in response to the wall of new government debt coming to the market to fund the likes of the wage subsidy scheme, the bank lifted its bond buying cap to $60b.
While the Reserve Bank is a relative newcomer to QE - other central banks have been doing it since the 2008-9 Global Financial Crisis - Bascand said the key lesson to be taken on board was that it helps.
As evidence, he pointed to five-year government bond yield that was trading close to the official cash rate of 0.25 per cent - good news for bank borrowing costs.
While he noted that retail borrowing costs had fallen, he wanted to see more reductions.
"In one sense, they [the banks] are probably a bit cautious there but as time goes on, and they are more confident that they can fund in different ways and at lower costs, they hopefully will see more of that flow through," Bascand said.
"We have seen some banks reduce their mortgage rates but we still think that there is a way to go," he told the Herald.
A spokesman for the NZ Bankers Association said the association would not comment on bank interest rates because it was a competitive pricing issue between its members.
The Reserve Bank last week left the door open to the possibility of negative interest rates in the wholesale market - a measure aimed at dragging retail and commercial borrowing costs lower still.
However some banks have been tardy in arranging their systems and documentation to accept negative rates. They have been given until December to get their systems in line.
Bascand did not give away any clues as to whether it would go down the negative rate track, other than to say the bank wanted to have that option, should it be required.
As it stands, he said the Reserve Bank's QE, or large-scale asset programme, (LSAP) was working well.
"It is lowering test rates across the curve and it has helped markets to function," he said.
Even though the OCR was close to zero, the Reserve Bank still had options.
In terms of its next likely step, Bascand said the bank would be better placed to make a decision in three months' time, when more is known about the pandemic and its effects on the economy.
"What is significant is that it is a very uncertain world that we are in at the moment, but as time goes on we will have some certainty," he said.
Expanding the asset programme to $60b was the right thing to do, he said, "and the most effective".
After just over a month, what were the bank's lessons learned from QE?
"First and foremost is that it does help. It does overall contribute to achieving monetary policy objectives," he said.
"It's not perfect. It does have side effects."
Bascand said the Government's fiscal policy was "doing all the heavy lifting" for the economy right now.
"Between us, we are both very focused on how we can support the economy to cushion the blow from this."