Negative interest rates and other unorthodox monetary policy tools are drawing nearer. Photo / 123RF
Negative interest rates and other unorthodox monetary policy tools are drawing nearer. Photo / 123RF
With the official cash rate now at 1 per cent, the prospect of negative interest rates and other unorthodox monetary policy tools draws ever nearer.
Reserve Bank governor Adrian Orr has said he is "completely open" to the possibility of negative rates or unconventional tools like quantitative easing.
What wouldthat mean? And how likely is it?
This week The Economy Hub talks to New Zealand Super Fund chief economist Mike Frith about what's going on.
As an economist providing advice to a $43 billion dollar fund with a 50-year horizon, Frith doesn't have to sweat the daily fluctuations of the market.
But he takes a close interest in the global trends and longer term economic cycles.
"They are running out of fire power," Frith says about the Reserve Bank's monetary policy.
"Once upon a time monetary policy makers and the central banks would use interest rates to try and stimulate economies. When that didn't work, they moved into those different methods."
One of the big, and often confusing, moves in the years since the global financial crisis has been to cut interest rates into negative territory.
That has happened in Europe, Japan and Scandinavia.
"Something like 25 per cent of all developed market government bonds- and some corporate bonds - pay a negative interest rate at the moment," Frith says.
"So you buy a bond for 100 dollars and in a year's time you get 95 back."
Effectively that means confidence in the economic outlook is so low that you are paying someone to keep your money safe.
"You're paying someone to borrow from you, and you take all the risk of them not paying you back," Frith says.
"I think everyone finds that real challenge. But it is happening."
"One of the benefits that the dollar bloc countries (Australia, New Zealand, the US and Canada) have had is that they have been able to keep their official cash rates above 1 or above 2 [per cent] even," he says.
"It gives them more powder They've got a long way to go before they have to countenance negative rates. The European central banks are not in that position."
It is hard to say what happens if New Zealand gets that low, he says.
Perhaps the bigger worry is "what does the world look like if we have to get that low?"
Currently, the most obvious concern is that the trade war between the US and China shows no sign of abating, he says.
This time last year, when the tariff discussion first emerged, most commentators had assumed it would all be well and truly over by now, Frith says.
"We've gone way past that and it's nowhere near sorted. In fact it's getting worse."
If conditions continue to deteriorate, another tool the Reserve Bank could look to is quantitative easing (QE) - or bond buying.
Trillions of dollars worth of QE was unleashed by the US Federal Reserve and other global central banks to prop up the financial system after the GFC.
Federal Reserve Chairman Jerome Powell. Photo / AP
The process is sometimes described as printing money because it appears to allow central banks to inject cash into the economy out of thin air.
There is always a bit of debate about that definition, Frith says.
But whether it is printing money or just buying bonds that would one day be sold back, it is a useful tool to boost liquidity in the economy, he says.
In the US, the Federal Reserve this year started selling bonds back in an attempt to unwind its position as the economy improved.
But just as trade war jitters had forced it to make a u-turn on its cycle of rate hikes, it had now halted the bond sell-off.
If New Zealand rates go too low, could we see QE here?
"The challenge we have in new Zealand is we have a small government bond market," Frith says. "The number's $60, $70 $80 billion - that's not very large. The US has US$20 trillion of bonds floating around out there that it can buy. "
Those bonds are also high demand and held by investors that need the returns from those bonds.
So they wouldn't necessarily be willing sellers.
"So it would be quite a hard and quite an interesting exercise."
Looking out across a long term horizon - as the Super Fund does - it was almost inevitable that there will be another market crash or global recession.
"Nobody wants that. What we do when we think about our long run expectations is to look back over 100 years," Frith says.
"And you've got $100 cash you can invest in a government bond risk-free, then you say: how much more do I need to invest in your company. You'll come up with a number and we find that number doesn't really change a lot over the last 100 years."
