Mood of the boardroom: RBNZ facing historic challenges

Adrian Orr remains confident the RBNZ has enough policy options. Photo / Mark Mitchell

Should the Reserve Bank cut interest rates below zero? Should it print more money to stimulate the economy?

There are some historic challenges facing Reserve Bank Governor Adrian Orr and his team this year as they assess the damage being done the economy by Covid-19 and moves to contain the spread of the virus.

Although the Mood of the Boardroom survey results suggest solid support for the actions taken so far, business leaders are divided about the next moves.

The global pandemic has already seen the Reserve Bank slash the official cash rate by 75 basis point to just 0.25 per cent.

It has also launched a Quantitative Easing programme, following the lead of the US and Europe, in an attempt to maintain liquidity in the local bond market and support the Government's massive Covid-19 borrowing plans.

The Reserve Bank now has scope to buy up to $100 billion of Government bonds in the secondary market by June 2022.

It has also put on hold a policy move to increase the capital requirements of our major banks.

That was one of the most divisive issues for the RBNZ last year.

But the decision to put it on hold was widely supported by business leaders with 81 per cent of Mood of the Boardroom respondents saying it was the right call.

Last year the survey found more than 43 per cent of respondents saw the capital ratio increase as a sound move to protect the New Zealand financial system.

Just 17 per cent of business leaders believed the increase would be a major impost on bank shareholders and nearly 35 per cent said they would be affordable given the level of banking profits.

But with banks having already made good progress towards the target and the need to ensure short term liquidity, the RBNZ didn't hesitate to put the capital ratio increases on ice.

"Regulatory Bank capital increases are a long structural game," said Ballance Agri-nutrients chief executive Mark Wynne.

"We need strong banks and provided this "hold" is relatively short, it was a good thing to do.

"However, it can't be put off indefinitely — there will be plenty more bank challenges ahead."

Business leaders were more divided over the RBNZ's next moves.

The prospect of negative interest rates did not appeal to 67 per cent of respondents. Just 15 per cent thought they were a good idea while 18 per cent were unsure.

When comes to expanding the RBNZ's quantitative easing respondents were more positive.

Nearly half (43 per cent) were in favour of further QE, 29 per cent were against and a similar number (28 per cent) were unsure.

Overall the results suggest a significant portion of business leaders see current monetary policy conditions as sufficient to get New Zealand through the crisis.

But they may also reflect a belief that monetary policy is reaching the limits of its power.

Reserve Bank Governor Adrian Orr has remained confident that the RBNZ has enough more policy options at its disposal — including cutting rates into negative territory.

The Reserve Bank has warned the banks to be ready for negative interest rates before the end of the year.

All the major bank economists now expect to see negative rates deployed early next year as the economic downturn drags on.

Westpac economists, the first to make the call, sees the RBNZ cutting the OCR to -0.5 per cent in April.
But Westpac chief executive David McLean isn't convinced.

While the bank would be ready for them he did not think they were effective.

"Negative rates would have adverse effect on confidence and be anti-stimulatory," he said.

Independent economist Cameron Bagrie is also sceptical. "I'm not a believer in negative rates. More effective (better executed) fiscal policy is a far better option."

But others felt it was important for the RBNZ to keep all the available tools on the table.

On the QE front there is still a long way to go before the RBNZ hits its current policy limit.

As at the last Monetary Policy Statement, the RBNZ had purchased $23 billion worth of Government bonds.

It also has options to purchase a wider range of assets including local government bonds and internationally issued bonds.

Whether that will ultimately be needed depends to a large extent on how long the pandemic drags on and how deep damage to the local economy runs.

That no doubt explains the large proportion of respondents who are unsure about the need for more.

Governor Orr has been cautious to emphasise that any moves the RBNZ makes depend on the conditions and economic context at the time.

Whether further monetary policy easing is required remains to be seen.

But we should hope it isn't.

Not just because of concerns about policy tools reaching their limits, because that would represent another slide in the economic conditions.