Reserve Bank at crossroads on a $100 billion journey.

Analysis: Tom Pullar-Strecker examines the unconventional tactics the Reserve Bank has deployed in the past year as it reaches the halfway mark in its $100 billion mission to pump liquidity into the economy.

Should the Reserve Bank be applauded for cushioning the economy from Covid and saving jobs, or blamed for putting a rocket under house prices and exacerbating inequality?

Last year the bank embraced ‘‘unconventional’’ monetary policies to stimulate the economy, and debate over its role boiled over as the housing market sizzled.

What has the bank done so far and what is supposed to be happening next?

Quantitative easing

This was the first ‘‘unconventional’ monetary tool that the Reserve Bank reached for and is now approaching its halfway-mark in terms of dollars spent.

The bank got the green light to print up to $100 billion to spend on buying back central and local government bonds, in a bid to pump more liquidity into the economy and reduce retail interest rates.

QE began in March and is due to run until June 2022, and so far the Reserve Bank has spent $43b of that allocation.

The amount of money the Reserve Bank spends on QE varies from week to week.

It states enigmatically that ‘‘staff have the flexibility to adjust the pace of purchases as market conditions dictate’’.

QE is currently taking a four-week summer holiday and bond repurchases are due to resume on January 18.

Spending on QE was always expected to start strong and tail off over time and the bank is under no obligation to run right up to its $100b cap.

But it is still notable that bond purchases fell to $4.1b in November after spiking at nearly $7.7b in September.

Could this be a sign that criticism the Reserve Bank has fuelled a housing and asset bubble might be getting to the bank?

It would probably be a stretch to claim that so soon, but the rate of decline in spending on QE in 2021 will be one statistic watch.

Funding for Lending

This second unconventional tool has involved the bank deciding to create up to $28b of new money to lend to banks at the Official Cash Rate, currently 0.25 per cent.

An unnamed bank or banks (the Reserve Bank won’t say who) made their first big drawdown under the scheme on December 21, tapping the central bank for $1b.

That was after some institution dipped its toes into the water by claiming a $40m loan, 10 days earlier.

The Reserve Bank first promoted Funding for Lending as a means to ensure banks would be able to pass on any further reductions in the OCR to borrowers, given that it is impractical for banks to send savings rates below zero.

But the broader impact of the scheme should be to lower retail interest rates by reducing banks’ funding costs, so Funding for Lending could also be ‘‘blamed’’ for pushing up house and share prices.

Unlike QE, which requires the Reserve Bank to actively run weekly auctions to buy bonds, Funding for Lending appears more automatic, in that qualifying banks have a straightforward entitlement to the loans.

So unless the central bank were to scrap the scheme early or expand it, this horse has bolted and there appear to be no other decisions to make.

A negative OCR

This is the most conventional of all the unconventional monetary tools at the bank’s disposal.

The Reserve Bank has hinted it could lower the OCR to a floor of about -0.75 per cent without encountering the risk that the normal operation of financial markets might start to break down.

But governor Adrian Orr promised to leave the OCR unchanged for a year on March 16 last year, so there should be no immediate change when it issues its next monetary policy statement on February 24.

Up until November, most economists assumed the Reserve Bank would cut the OCR below zero this year.

But those expectations cooled rapidly as a result of a stronger-than-expected post-lockdown bounce.

A compromise might be for the Reserve Bank to start moving the OCR in smaller increments.

Further cuts to the OCR would send a strong signal to home buyers that this was still a good time to borrow-up large, but it seems simply too soon to make any meaningful forecast about how likely that is.

Foreign asset purchases

This dark horse in the Reserve Bank’s unconventional toolkit could yet get a dusting off in 2021.

The Reserve Bank said in November that foreign asset purchases were still under consideration.

Under this policy, the Reserve Bank would print New Zealand dollars to exchange for foreign government bonds, such as US Treasury bonds, or other assets that were not denominated in New Zealand dollars.

Pivoting to buying foreign assets could prove attractive in a situation where house-price inflation sapped the bank’s appetite for QE or lower interest rates, but where it remained concerned by an appreciation of the New Zealand dollar.

The bank has said the most direct impact would be to bring down the exchange rate, improve the competitiveness of exporters and raise inflation by making imports more expensive.

The Reserve Bank has previously described that as a potentially useful move ‘‘if a specific economic shock was from offshore and resulted in an overvalued New Zealand dollar’’.

Arguably that is the situation that may now be building, with New Zealand free of Covid restrictions, the pandemic plaguing many of our trading partners, and the kiwi trading above 72.5 US cents and closing in on a five-year high.

But it may be that the exchange rate hasn’t reached the trigger point for such action just yet.

$100b

What the Reserve Bank can spend under quantitative easing

$43b

What it has spent so far

Quantitative easing is currently taking a four-week summer holiday.

Housing controls

Loan-to-value restrictions on bank mortgage lending will take effect again from March.

But the bank expects the impact of the policy will be less than previously, given that banks have already stepped back from more risky lending.

Debt-to-income ratios are another sticking plaster that could help ensure home buyers don’t get over their heads in debt if the Reserve Bank keeps its foot down on its untargeted monetary stimulus, though like LVRs, they also won’t change the underlying supply and demand for housing.

What, if any, other specific steps the Reserve Bank or Government might take to rein-in the housing market promises to be the subject of intense discussion between the bank and Finance Minister Grant Robertson.