Reserve Bank may punt $90 billion on QE
ANZ expects the Reserve Bank will increase the cap on quantitative easing to $90 billion in August, by earmarking up to another $30b for bond purchases.
The Reserve Bank increased the size of its quantitative easing (QE) programme from $33b to $60b last week in an effort to sooth financial markets.
ANZ chief economist Sharon Zollner said its forecast of another splurge was partly based on the fact that the Government had given the Reserve Bank a letter of indemnity giving it approval to go even further.
‘‘They asked for permission to buy up to half of the government bonds on issue and up to 30 per cent of local government bonds on issue.
‘‘That is a lot more than $60b,’’ she said.
ANZ correctly forecast in March that the Reserve Bank would increase the size of its QE programme to $60b.
One goal of quantitative easing is to ensure forecast increases in government spending don’t suck liquidity out of the banking system and push up interest rates for private sector borrowers.
ANZ said in its weekly bulletin that a further ‘‘scaling-up’’ of QE when the Reserve Bank issued its next monetary policy statement in August would help markets absorb increased sales of government bonds.
The central bank had other options to ease monetary conditions, including moving the official cash rate down from 0.25 per cent, perhaps into negative territory, it noted.
But it said QE remained the Reserve Bank’s ‘‘tool of choice’’.
‘‘At his appearance before the finance and expenditure committee, governor Adrian Orr said that QE was easy, effective and had the least distortions.
‘‘We agree that it is the right approach, for now at least,’’ ANZ said in its bulletin.
Quantitative easing has so far involved the Reserve Bank buying central and local government bonds from private investors through reverse auctions — using money that it essentially creates from nothing on its computers.
Zollner said New Zealand had been a later-comer to QE but a jump to $90b would put it in about the same situation that the United States’ Federal Reserve had been in prior to
Covid-19.
A $90b programme would mean the value of assets bought by the Reserve Bank through QE would equate to about 30 per cent of the country’s
2020 forecast GDP.
By comparison, analysts at AMP have forecast that the balance sheet of the US Federal Reserve could balloon out to US$11 trillion (NZ$18.4t) by the end of the year, almost entirely as a result of QE.
That would equate to about 50 per cent of the United States’ forecast GDP.
Any further increase in QE in New Zealand is likely to fuel concerns that the extra liquidity the Reserve Bank is pouring into the economy could be hard to mop-up in future, and could end up fuelling inflation.
Despite the speculation of more QE, both Kiwibank and ANZ have made more positive assessments of the country’s economic prospects in recent days.
Kiwibank said in a research note yesterday that it was feeling ‘‘a little bullish’’.
The state-owned bank said that if New Zealand could avoid a return to a tighter lockdown without any major setbacks, ‘‘the downside risks to the economic forecasts may start to recede’’.
That assessment followed a comment from Zollner on Friday that New Zealand had a shot at getting away with ‘‘just a regular horrible recession’’ because of its success tackling Covid-19.