New Zealand central bank turns to quantitative easing

Bloomberg

New Zealand’s central bank has taken the historic leap to quantitative easing to try to limit a looming recession as the negative economic impacts of the coronavirus outbreak intensify.
The Reserve Bank will buy up to NZ$30 billion ($17 billion) of government bonds in the secondary market over the next 12 months, it said in a statement on Monday. It will seek to buy NZ$750 million bonds a week across a range of maturities, via an auction process, it said. The program will begin this week with NZ$500 million of purchases.
The RBNZ had come under mounting pressure to unleash QE for the first time as the coronavirus pandemic roils financial markets around the world and a domestic recession looks imminent. Bond yields have soared on the prospect of a flood of debt issuance by governments as they look to fund massive fiscal spending packages to counter the economic slump.
“This package is huge,” said David Croy, interest rate strategist at ANZ Bank New Zealand in Wellington. “QE will help support the economy and soothe markets that have been dysfunctional. This package will have an immediate and significant impact on the local bond market.”
New Zealand bond yields slumped across the curve after the RBNZ’s announcement. The 10-year yield plunged 52 basis points to 0.95% after soaring as high as 1.77% last week.
The kiwi dollar extended its decline, buying 56.73 U.S. cents at 9:49 a.m. in Wellington. The currency has dropped almost 16% since the start of this year.
The RBNZ’s Monetary Policy Committee last week cut the official cash rate to 0.25% and freed up limits on bank capital. The government also announced a NZ$12.1 billion support program and promised more to come, spooking debt markets with the prospect of a flood of bonds into the market.
“The RBNZ is, in effect, stepping up to fund the government,” said Nick Smyth, interest rate strategist at Bank of New Zealand in Wellington. “The QE program will, at the very least, help offset the upward pressure in yields that would have occurred due to the forthcoming increase in issuance.”
The RBNZ said it will exclude inflation-indexed bonds from its purchases. That means it will buy as much as 55% of the nominal bonds outstanding in the market, adjusted for the approaching maturity of April 2020 bonds, Smyth said. The program is the equivalent of 10% of gross domestic product, he said.
The government supports QE and has signed a memorandum of understanding and a letter of indemnity with the RBNZ to enable the program to proceed, Finance Minister Grant Robertson said in a statement.
“This is part of our strategy to mobilize all arms of New Zealand’s economic infrastructure in our fight against the COVID-19 virus,” he said. “We are all uniting together -– the Government, the Reserve Bank, private businesses and the retail banks -– to cushion the impact on New Zealand from this global pandemic.”
The RBNZ is joining other central banks in the QE club, including Australia’s, which last week pledged to buy three-year bonds and target a yield on those securities of 0.25%.
“The severity of the impacts on the New Zealand economy has increased,” the RBNZ said today. “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. Employment and inflation are expected to fall relative to their targets in the near term.”
The RBNZ also said that financial conditions in New Zealand “have tightened unnecessarily” over the past week, reducing the effectiveness of the low OCR.
“Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding,” it said. The bond purchase program “aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low,” it said.