Does RBNZ need to ramp up the printing press?

Reserve Bank of NZ Governor Adrian Orr. Photo / Mark Mitchell

The Reserve Bank held its large-scale asset purchase programme steady at $60 billion in June and said it could print more money if necessary. But is it?

A much better-than-expected bounce in the domestic economy may mean it doesn't have to ramp up the press just yet, although the labour market remains a wildcard.

There are a few reasons it may hold fire at the August 12 review.

One: the government isn't spending as much as it planned, keeping $14 billion of the country's $50 billion covid-19 recovery fund in its back pocket, just in case there's another outbreak.

"The New Zealand economy is currently doing better than predicted," finance minister Grant Robertson said when making the announcement.

If the government doesn't need to spend, why would the central bank need to up the programme?

Backed by data

Two: the data, which back up Robertson's claim.

Electronic card transactions and home sales are back at pre-covid levels, activity in the manufacturing and services sector jumped with both indices back above 50, indicating expansion.

Even the beleaguered tourism sector looks to be faring better than expected.

Wellington airport expects its domestic capacity to be at 75 percent in August based on current seat availability and there was pretty much standing room only at Mt Ruapehu during the school holidays.

Air New Zealand ramped up its domestic schedule for August to 70 per cent of pre-covid levels versus the planned 55 per cent. That basically means 408 more flights and another 18 that have been upgraded to a bigger plane.

Less dire

Conditions are definitely less dire than the RBNZ predicted in its latest forecasts.

In its May monetary policy statement, the bank said the economy would contract 21.8 per cent in the June quarter before bouncing 23.8 per cent in the September quarter.

"The NZ economic recovery is clearly running ahead of RBNZ forecasts which means they can afford to be a little more patient," said ASB Bank senior economist Mike Jones.

The bank has plenty of bond buying headroom remaining under the existing cap in the large-scale asset purchase - LSAP - programme and the other easing measures deployed, to date, seem to be doing their job, he said.

"It's far from certain that the bank will use the August meeting to increase the LSAP or deploy alternative easing measures."

So far the RBNZ has snapped up $22 billion of government and local government bonds.

Bank of New Zealand senior economist Doug Steel said the recent turnaround suggests that the decline in June-quarter GDP will be "considerably less than the -21.8 per cent that the RBNZ factored into in its latest projections."

He is tipping a 16 per cent contraction.

Steel does expect the bank to outline the outlook for its LSAP programme in the August statement as it said it would in June. But he said it can bide its time on the implementation.

"We think the bank has time to assess things before committing to a defined increase in LSAP," he said.

Different views

Not everyone agrees.

Kiwibank expects the central bank to extend the LSAP programme, which is due to wrap up in May 2021, into 2022 and to take the total amount toward $100b at next month's policy review.

"More will be needed from the bank to ensure it meets both its employment and inflation mandates over the medium term. We agree that the local data of late has been encouraging. But because of the nature of the global covid-19 shock we think that a swift full recovery is highly unlikely," said senior economist Jeremy Couchman.

Among other things, "the removal of the wage subsidy bandage will likely reveal a nasty labour market wound." Unemployment will likely hit 10 per cent by the end of the year and that will weigh on the housing market.

Also, NZ's borders remain closed and are likely to remain that way until well into 2021, he said.

More time to buy

Westpac Bank chief economist Dominick Stephens also expects the RBNZ to extend the timeframe, but not for quite as long. He now sees it running out to August 2021.

He expects the rate of bond purchases to continue at the same pace and so the overall programme will be $80b.

"I think they need to do that because inflation is expected to drop to almost zero by mid-2021. They will need to maintain monetary stimulus for a long time to rectify that. Ceasing purchases in May 2021 is not realistic, it would create a big lift in interest rates," he said.

The RBNZ's bond-buying spree has contributed to lowering interest rates and flattening the yield curve, in particular at the long end.

ANZ Bank chief economist Sharon Zollner expects the RBNZ to lift the LSAP programme to $90b in August.

"We will likely see increases in its volume and potentially the type of assets purchased beyond that," she said.

"The bounce out of lockdown has been vigorous and we've had a fun time spending our lockdown involuntary savings and our international holiday funds on big-ticket items. But those aren't sustainable sources of spending and will peter out."

Firms' investment and employment intentions are both at recessionary levels and the number of people on unemployment benefits is rising sharply, she said.

More pain

The pain from the loss of international tourism hasn't been felt fully yet because the country is at a seasonal low point and many firms are still using the extended wage subsidy scheme "but it's coming. It's completely baked in."

She also points to employment as being a major Achilles heel.

"The unemployment rate is set to go considerably higher than it did in the last recession and that has consequences for retail, hospitality and the housing market," Zollner said.

Those consequences are playing out relatively slowly despite the abruptness of the shock because of the wage subsidy scheme, she said.

As of July 17, there were 437,000 jobs associated with the wage subsidy extension, which will run out in September.

"That's a lot of jobs under a very dark cloud - the employer has experienced at least a 40 per cent hit to their revenue."