Orr not ruling out RB buying corporate debt

Reserve Bank Governor Adrian Orr says it’s a case of ‘‘never say never’’ when it comes to using unconventional monetary policy tools like buying corporate debt to stimulate the economy.

The bank has already promised to purchase up to $60 billion worth of central and local government debt to stabilise the economy. It’s said it might look at increasing that amount soon.

So far, the bank hasn’t followed its international peers in purchasing corporate debt, but Covid-19 briefings released from Treasury last Friday showed the bank had considered, but later rejected the idea of creating money to buy the bonds of companies like Fonterra and Meridian Energy.

Orr said the idea was still on the table, although it was unlikely it would be used.

‘‘I would never say never, because there are always options. But options come with risk.’’

The risk in purchasing corporate debt would mean the bank would be exposed to riskier investments.

‘‘You shift up that risk spectrum, and that brings more risk onto the Crown balance sheet, being our balance sheet, and at that point, we’d have to think really hard around is the effort worth the outcome,’’ Orr said.

The ‘‘hardest part’’ of buying corporate debt would be the distributional impact on the market as presumably many companies would want the bank stabilising their borrowing costs by creating money to buy their debt.

‘‘You create the club and everyone wants to be a member. And what is the shut off? – that’s a real challenge.’’

He said that other moves could be on the table, including a negative official cash rate or further government bond purchases rising above the two caps the bank has at the moment: 50 per cent of all outstanding debt up to $60b. Orr had initially said the bank would only look to purchase up to 50 per cent of all government debt on the market. This was to ensure there was still a functioning private market, but he confirmed that even this level could be breached.

Adrian Orr Reserve Bank Governor

‘‘There’s nothing magic about that 50 per cent. The market could still operate, given the debt market is still small relative to our GDP we might be able to hold even more as a percentage [of total government debt],’’ he said.

But one of the things on Orr’s mind is the economy will have to wean itself off the enormous amount of monetary stimulus.

‘‘How do you wean yourself off immediate triage-type things into more sustainable long-term policies that are going to create that real growth?’’

He said one of the bank’s ongoing concerns since the Global Financial Crisis was that people would take on unintended risks in the search of ‘‘an extra half a per cent yield on the savings’’.

The Reserve Bank is still warning retail banks to get ready for a negative official cash rate. Rolling this out has been said to be difficult because banks systems weren’t ready and some contracts with depositors didn’t envisage a negative interest rate – effectively a charge on depositors.

Orr said most banks were in a good position to deal with negative rates.

‘‘Some large multinational banks have been dealing with negative interest rates for a long time and some of the smaller banks, which have much simpler systems, are good to go,’’ Orr said.

"Only a handful of banks’’ were having difficulty with negative rates.

Orr appeared to downplay the extent to which a negative rate would impact all areas of a bank.

‘‘What we’re doing at the moment is double checking with all of the banks, so they’re not trying to get absolutely everything capable of a negative [rate] because we don’t need absolutely everything.

‘‘We’re saying it’s a small proportion; it’s the wholesale side of the business,’’ Orr said.

Ordinary depositors likely wouldn’t notice a difference because rates would still be positive for depositors.

‘‘Internationally the experience has been that banks have been highly reluctant to go below zero for a deposit.

‘‘In fact, retail banks’ reluctance to pass on negative rates to consumers are likely to act as a brake on the Reserve Bank’s appetite to push rates lower.’’

‘‘You create the club and everyone wants to be a member.’’