New Zealand's Reserve Bank Governor Adrian Orr speaks to the media in Wellington, New Zealand. AP File Photo.
New Zealand's Reserve Bank Governor Adrian Orr speaks to the media in Wellington, New Zealand. AP File Photo.
The Reserve Bank has committed to injecting $30 billion - the cash equivalent of one tenth of New Zealand's annual GDP - into the economy to keep interest rates low and financial markets stable.
It may yet do more. These are extraordinary times.
With the official cash rate now ata record 0.25 per cent quantitative easing (QE) is now the RBNZ's primary tool for keeping rates down.
"Bond markets have reacted swiftly and sharply, with the term structure of the NZGB yield curve going lower and flatter," said ANZ markets strategist David Croy.
"As the risk-free rate in the market, it was crucial that the RBNZ took steps to prevent yields spiralling out of control, as was starting to happen late last week."
Croy described the scale of the RBNZ move as "huge" - larger than most market analysts had expected.
ALERT_STAGES
In a statement this morning the RBNZ said the monetary policy committee (MPC) had decided to implement a large-scale asset purchase programme (LSAP) of New Zealand Government bonds.
"The severity of the impacts on the New Zealand economy has increased," it said.
"Weaker global activity is affecting the economy through a range of channels, not just reduced trade. Domestic measures to contain the outbreak of the virus are also reducing economic activity."
In addition, financial conditions have tightened unnecessarily over the past week, it said.
That was reducing the impact of the low OCR and negatively affecting the RBNZ's mandated targets for inflation and unemployment.
"With massive synchronised fiscal expansion occurring across the globe, the funding task was always going to be too much for global bond markets to bear, and QE is the only way out," ANZ's Croy said.
"The upshot is that the RBNZ will absorb the new bond issuance required to fund the Government's increased spending plus some.
"And it will be done via the secondary market (rather than buying bonds directly from the Treasury), which should keep the market functioning properly."
"At around 10 per cent of annual GDP, the programme is similar in size to the quantitative easing programmes that other countries announced during the global financial crisis, which were effective in bringing longer-term interest rates down," said Westpac chief economist Dominick Stephens.
The Reserve Bank warned that employment and inflation are expected to fall relative to their targets in the near term.
"The negative economic implications of the coronavirus outbreak have continued to intensify," it said.
"Globally, the number of people infected with the virus has increased rapidly and measures to contain the outbreak have become more restrictive. Global trade and travel and business and consumer spending have been curtailed significantly."
The economic cost would be severe, Westpac's Stephens said.
"Last week we forecast that GDP would fall by 3.1 per cent. That was based on assumptions such as an 85 per cent drop in overseas arrivals, a 70 per cent drop in domestic travel, and a 4 per cent drop in domestic consumer spending.
"The measures announced today are much tougher than that, so the impact on GDP will be much larger than 3.1 per cent. While this will be a dramatic decline in economic activity, it will be temporary."
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.
Why now?
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.
How much?
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.
