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Bernard Hickey
Bernard Hickey is the Executive Editor of Newsroom Pro based in the Parliamentary Press Gallery.
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Economy
The Reserve Bank has nearly doubled its government bond purchase program, which is sometimes described as “money printing” or “Quantitative Easing for the wealthy,” reports Bernard Hickey.
Reserve Bank Governor Adrian Orr has announced yet another massive easing of monetary policy in response to Covid-19’s global economic shock.
Orr said the bank’s Monetary Policy Committee had agreed to increase the potential of the bank’s large-scale asset purchase program (LSAP) to $ 60 billion from the $ 33 billion limit agreed in March. He said the program, which is often called Quantitative Easing (QE), would also be expanded to include government inflation indexed bonds, since it had already included Local Government Financing Agency bonds. But it does not include Kainga Ora or other semi-government or corporate bonds.
“The global economic shock caused by the Covid-19 pandemic is expected to persist and lead to slower economic growth, employment and inflation both in New Zealand and abroad. Even if New Zealand successfully contains the spread of the disease locally , global activity will decrease means less demand for many of New Zealand’s exports, “said the Reserve Bank.
“The expansion of the LSAP program aims to continue to reduce the cost of borrowing quickly and sharply. This is preferable to delivering a smaller amount of stimulus now, only to risk realizing that more should have been done,” he said.
“We expect retail interest rates to decrease further as the lower costs of wholesale loans are transferred to retail clients. It remains the best long-term interest in the banking sector to quickly maximize the effectiveness of our LSAP program.”
The initial $ 30b QE program was announced on Monday, March 23, shortly before the announcement of the Level 4 crash. It was expanded to include up to $ 3b in local government bonds on April 7.
The Reserve Bank said the Official Cash Rate (OCR) remains at 0.25 percent according to guidance issued on March 16 that it would remain there for a year, in part because some of the bank’s computer systems cannot handle negative interest rates.
Lt. Governor Geoff Bascand said at a press conference that the bank expected banks to be ready to handle negative interest rates by the end of the 2020 calendar.
“The Monetary Policy Committee is prepared to use additional monetary policy tools if necessary, including further reducing OCR, adding other types of assets to the LSAP program and providing fixed-term loans to banks,” the bank said.
Some critics of QE programs in the past decade have said that policy is effectively a stimulus for asset holders (the wealthy) that does not reach the poor, because banks have not lent much to companies for creating jobs and the poorest citizens have no loans. to benefit from lower interest rates, or your loans have much higher consumer interest rates.
The Reserve Bank said the Monetary Policy Committee was pleased that both wholesale and retail interest rates have fallen. Market functioning has also improved, a secondary objective of the LSAP program.
“Further declines in retail interest rates would be needed to fully deliver the stimulus. The Committee noted that long-term interest rates in the government bond market are also sensitive to a number of factors external to the LSAP program, including bond issuance and foreign bond yields, “the bank said.
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