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. It's 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 govt 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 is $30billion over the next 12 month is huge. At more than 10 per of NZ's total annual GDP it is bigger than markets anticipated
The Reserve Bank has moved to push interest rates down further - by buying up to $30 billion in government bonds - New Zealand's first ever move to Quantitative Easing (QE).
Effectively QE is now the RBNZ's primary tool for cutting rates.
With no room left to cut the official cash rate the RBNZ is being forced to use QE for the first time to try and push market rates lower.
The process is also sometimes dubbed "money printing" because it can effectively release large amounts of cash into the economy.
Its primary purpose is to push interest rates lower but may in fact be needed just to hold them down as credit markets around the world have been under intense pressure after trillions of new government debt was unleashed last week.
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"The programme aims to provide further support to the economy, build confidence and keep interest rates on government bonds low," the RBNZ said in a statement.
Initial indications were that the announcement had the desired effect.
Ross Weston, senior portfolio manager at Kiwibank, said long-end bond yields were 50-60 basis points lower as a result of the programme.
He also said spreads between government bonds and swap rates had contracted a lot after a huge period of widening. "That is not the case now."
The Kiwi dollar fell almost one per cent on the news and is now trading around US56.6c.
Economists applauded the move.
"This package is huge," said ANZ economists this morning
"Our analysis last week flagged the need for purchases of $15-20 billion per annum. Our expectations were at the top end of market expectations, so we expect this package to have a significant impact."
The RBNZ committee said it will monitor the effectiveness of the programme and make adjustments and additions if needed.
"The low OCR, lower long-term interest rates, and the fiscal stimulus recently announced together provide considerable support to the economy through this challenging period."
"At around 10 per cent of annual GDP, the program is similar in size to the quantitative easing programs 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.
"This does not change our forecast of a 3.1 per cent decline in GDP. Rather, it was a necessary step to prevent an even worse outcome."
How it works:
"It means we can use our money," said Reserve Bank Governor Adrian Orr, talking to the Herald last week.
"We can give our cash to a third party for their assets. They've got cash now, and we've got the asset on the balance sheet."
Those assets in the foreseeable future, would be government bonds - although there are other assets that can be bought if more unconventional QE is required.
The key point is that the third party now has cash to spend.
Orr says he doesn't buy the "money printing" analogy, primarily because the assets the Reserve Bank buys will stay on the balance sheet.
Printing money seemed to mean different things to different people but would be the equivalent of "handing out IOUs" with nothing behind them, he said.
But it "was just another way of getting cash into the economy, using a different tool".
With government bonds, the Crown would continue to issue debt as usual but the Reserve Bank would buy in the secondary market.
That meant "those banks which are holding bonds know there is always a buyer in the market at a certain price", Orr said.
"The fact that we are there, buying those, will keep the interest rate down."
New Zealand never had to resort to QE during the 2008 crisis but at that time the Reserve Bank had head room to cut the official cash rate far more deeply - from 8.25 per cent (in June 2008) to just 2.5 per cent in April 2009.
- additional reporting BusinessDesk