New Zealand's Reserve Bank has made another unorthodox policy move to inject cash into the banking system.
Starting from today it will hold a weekly open market operation (OMO) buying up to $500 million of corporate and asset-backed securities for terms of up to three months.
Reserve Bank Governor Adrian Orr said the facility would provide another channel for banks to continue funding their corporate clients.
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Last week the RBNZ began its $30 billion Large Scale Asset Purchase Programme, a tool to provide liquidity and ensure interest rates remain low (see Q&A explainer below).
"There's monetary policy and then there's financial stability," Orr said. "The monetary policy has been the OCR and then the QE."
Everything else, including today's move, was around maintaining liquidity and financial stability in the market, he said.
"It's making sure the plumbing is working."
The objective of the latest move was to encourage banks to continue to fund their clients by purchasing their corporate debt securities (commercial paper), with the confidence that those securities can be funded by exchanging them with the RBNZ for cash.
"It's just to make sure people know there is a market for this and there always will be an ability to liquidate [commercial paper] and get the cash for it," Orr said.
Orr said last week's QE had worked well so far.
"Every day is a new challenge but without doubt the Quantitative Easing is working very well. Markets have stabilised and interest rates have remained very low."
Today's move was another step forward, said KiwiBank chief economist Jarrod Kerr.
But it didn't go as far as it could have.
There was actually plenty of liquidity in the market now, with around $21b cash in the system, compared to around $7b "normally", Kerr said.
"What fund managers and banks are actually seeking, is an outright buyer for credit."
When it came to the next big moves for the RBNZ, Kerr said he expected to see it would become active in buying council (AKL, LFGA) debt and perhaps Housing NZ debt (although that was a very small market).
"Then corporate bonds will possibly be added in any further bouts of stress."
Kerr noted that the RBNZ has already indicated it could look to expand the range of assets purchased, with Orr assuring "no shortage of opportunities".
Orr said today that those were still options but "we were quite a long way away from it".
"We've only just started on the journey with the Government bonds but you can take on other asset classes," he said.
It was fair to say the RBNZ had been successful in calming credit markets, Kerr said.
A couple of weeks ago it was starting to look like the beginning of a credit crunch - where overnight interest rates spike sharply freezing markets (as happened before the GFC), he said.
"Things were stretched and spreads were widening, which is a clear signal of stress," he said.
Announcing themselves as a buyer of last resort was "a strong move" for the RBNZ to make.
"Funds and trader and banks are now all a little bit more relaxed about their ability to cope with the stresses out there."
Following today's move ANZ economists said they felt the RBNZ now had the right measures in place for the time being.
While this was not quite a move to more quantitative easing, it meant that "the menu of offerings from the RBNZ in its operations now looks complete".
In theory, the scheme should make it easier and more attractive for banks to acquire commercial paper (CP) and corporate bonds because the RBNZ will fund these purchases, ANZ chief economist Sharon Zollner said.
"We certainly think it will help increase demand for CP and corporate bonds, easing market pressure," she said.
"But the size of the scheme may need to be increased or varied from week to week."
Quantitative Easing (QE) Q&A:
What is QE?
Quantitative easing (QE) is a tool that central banks use to inject cash into the economy when other measures - like cutting interest rates - reach their limit.
How does it work?
The bank creates the funds to buy Government bonds on the secondary market. This puts cash into the financial system. Its role as large-scale buyer puts a cap on Government bond yields debt and reassures markets when they are stressed and interest rates spike.
The RBNZ has already cut rates as low as it practically can, leaving QE as its preferred next tool.
With trillions of dollars worth of bonds issued to fund stimulus globally, markets were stretched and rates were rising on NZ Government bonds.
The RBNZ has acted now to put downward pressure on those rates and to help cushion the economy and facilitate the issue of more Government bonds to get us through the crisis.
The limit of $30b over the next 12 months is huge. At more than 10 per of NZ's total annual GDP it is bigger than markets anticipated.