RB may ‘print money to buy US bonds’

Westpac is forecasting the Reserve Bank may increase its quantitative easing programme to as much as $100 billion, in the wake of a dovish monetary policy statement by the central bank last week.

A Government document dump has, meanwhile, revealed that the Reserve Bank expects to lose $2.3b on the $60b programme of quantitative easing it has signalled so far.

Treasury reported that $2.3b was the bank’s ‘‘best estimate of large but plausible interest rate losses arising from the programme’’ in the period to 2040.

Up until now, quantitative easing has involved the Reserve Bank creating money on its computers and using that exclusively to buy bonds issued by the New Zealand government and public sector, to lower interest rates and inject liquidity into financial markets.

But ANZ chief executive Sharon Zollner said the next ‘‘cab off the rank’’ in monetary easing might be the Reserve Bank buying foreign assets to reduce the value of the dollar.

That was signalled as a policy option when the Reserve Bank reviewed the OCR on Wednesday.

‘‘You are printing money and buying probably US Treasury bonds with it,’’ Zollner said.

The impact on the exchange rate could be ‘‘reasonably large’’ just as a result of the Reserve Bank announcing it was going to do that, she said.

To avoid QE causing inflation, the Reserve Bank may need to ‘‘cancel’’ rather than reinvest the principal repayments it receives when its bonds are redeemed down the track should boom times return.

But whether and when that happens is anyone’s guess and in the context of those bigger decisions, the $2.3b in forecast interest rate losses may be somewhat notional.

ANZ strategist David Croy said the $2.3b loss quoted by Treasury was ‘‘theoretical’’, based on a lot of assumptions – such as a rising interest rate – and was not a cost that would in practice need to be funded.

Loosely, the Reserve Bank’s loss would also be the Treasury’s gain as it would mean the yield on Treasury bonds the bank had purchased through QE had fallen below market rates, he said.

ANZ had previously tipped the Reserve Bank might increase the cap on its QE programme to $90b in August and Zollner said the central bank’s OCR review had ‘‘cemented’’ its view.

But Reserve Bank deputy governor Geoff Bascand last month described an increase to $90b as ‘‘pretty speculative’’.

Arguably little material has changed – other than exchange rates – since he stated that opinion.

BNZ research head Steve

Toplis argues there is no immediate need for the Reserve Bank to increase its QE cap, given that it still has more than $40b left to spend on the programme by April next year.

Only time will tell who is reading the tea leaves correctly.

But trying to ‘‘out ease’’ the United States Federal Reserve doesn’t look like a realistic option.

The balance sheet of the US Federal Reserve is expected to balloon to US$10 trillion by the end of year and it has endorsed buying junk corporate bonds as part of its now uncapped QE programme.

Coronavirus cases are rising rapidly in southern and western states and few in the US appear to think its QE programme is ever going to be neatly unwound.

In that context, trying to keep the NZ-US exchange rate stable for Kiwi exporters could become like trying to catch a falling knife.

If the US dollar collapses – as some experts are predicting – the Reserve Bank could lose a lot more than $2.3b buying US treasuries.

The impact on the exchange rate could be ‘‘reasonably large’’.