Game’s up

I may well have more to write about the Reserve Bank announcement this morning after the Governor’s press conference at 11am – which I hope begins with a formal apology from him and Hawkesby for their appalling complacency and minimisation of the issues as recently as a few days ago –  but these are some initial reactions.

I guess I have three key points:

First, a 50 basis point was warranted at the time of the last  MPS (and doing so would have been entirely in line with past practice of reacting to out-of-the-blue shocks) so 75 basis points now is seriously inadequate.   Everything has got a great deal worse since then including –  though not mentioned in the statement –  medium-term inflation expectations.

Second –  and this was the mindblowing bit to me –  was this extract from the minutes

Staff also advised that an OCR of 0.25 percent was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.

This is simply inexcusable if true (which it may not be).  As just one small point, I lead a working group at the Bank in 2012 –  height of the euro crisis – which identified then the need to ensure, as a matter of urgency, that banks and the RB itself were able to operate with modestly negative interest rates.   And for years we have seen various other countries operating with negative policy rates, so if the Bank has not been taking action to ensure the system could operate, when needed with negative rates it is simply an inexcusable failure. For which, frankly, heads should roll.   Neither when they put out their Bulletin article two years ago nor in the Governor’s speech last week was there any suggestion that negative rates could not be used now.  Best surmise, they simply weren’t taking things sufficiently seriously until the last few days.

And, third, they have basically conceded that it is game over and that monetary policy has reached current limit  (which is so wholly because of their failures –  on this narrow point and, like most of their peers, dealing more decisively with the near-zero lower bound.

Note that as part of their statement they formally rule out any further changes –  including cuts –  for at least the next 12 months.  In other words, tbey rule out taking urgent action now to remedy their past failures.  Simply extraordinary.   I guess climate change and the like were taking priority for the Governor and his staff?

But the point I also wanted to focus on was this bit of the resolution.

Agree that Large Scale Asset Purchases of New Zealand government bonds would be the best additional tool to provide further monetary stimulus in the current situation – if needed.

I never got round to writing about the substance of the Governor’s seriously inadequate speech last week, but had I done so one of the points I would have made was that outside immediate financial crisis conditions –  not NZ now –  these asset purchase routes simply did not offer much.    It isn’t as if bond yields are now at the still-high levels they were in most countries in 2009 even after the OCR had been cut (even if they have been rising in the last few days as the global rush to cash has taken hold).

You might doubt my interpretation –  but you really shouldn’t as it is pretty widely shared, even if often in muted language –  but, as it happens, we have the word of one of the MPC members for it.  Again, I’d been meaning to use this in a fuller post this week.  I hadn’t seen this quote elsewhere, but in his column in Friday’s Herald Brian Fallow reported the RB Chief Economist Yuong Ha as saying, of the unconventional options,

“they give you a little more headroom, a little more more and space”

Precisely.  And “just a little more” is not what the occasion demands.

In effect, in this announcement it is a case of “one and done” –  not in sense of “we”ll be bold and not need to move again” –  sort of their justification for the 50 point cut last year –  but “we’ll move now, and then……well, we have to retire from the field and stare into the macro/monetary abyss….because we spent years just not doing our job, distracted by all sorts of pet things, always looking for rates to rise (as recently as the last MPS).

It really is inexcusable.   Personally I think there is a strong case for dismissing the Governor, and probably most of the MPC too –  including those externals we’ve never heard a word from to explain or justify their collective inaction and failure of preparedness.   I don’t suppose it will happen, but it is what often does –  and should –  happen after battlefield disasters and revealed gross failures of preparedness.   Then again, to act would be for the Minister of Finance to concede some of his responsibility –  he appointed them, he is supposed to hold their feet to the fire, hold them to account.  And only a few months ago in a letter to me he indicated how satisfied he was with the Governor’s stewardship.

I plan to have a fuller post this afternoon on some ideas for macro management now and in the months ahead.  As I’ve said in posts last week and on Twitter, now isn’t the time for stimulus per se –  new spending by the public isn’t the goal as the economies of the world deliberately de-power. The immediate focus has to be income support, the health system, and then some assurance about the framework to see us through the period –  perhaps protracted – until genuine stimulus becomes the appropriate focus.



21 thoughts on “Game’s up

  1. Michael
    What is your feeling about the relative merits of the RB buying government bonds or corporate bonds?
    Given that we are certain to see a lot more of the former issued, I’m skeptical that RB purchases will have much impact on the Government yield curve, whereas RB purchases of corporate bonds will at least hold the credit spreads in check.
    Not that companies will be undertaking much discretionary investing for the foreseeable future.
    Although on “the future”, you may find this an interesting piece of analysis of the potential scale and duration of the pandemic;


  2. I guess one to think about what the purpose of buying secondary mkt corporate bonds would be. Won’t be any new issuance, so doesn’t help there. In a sense this is the problem with these alternative options – they can help at the height of a genuine fin crisis, but don’t achieeve much here (since more settlement cash also isn’t the presenting issue).

    A std textbook (and) BOJ actuall approach to buying govt bonds would simply be to stand in the market – buy everything on offer at (say) 20 bps, or even zero.

    Still thinking a bit further about the best overall package.


  3. Please excuse what is probably a dumb question. Assuming the current situation continues for an extended period then the govt will have the same problem governments had in the early 1930s – a significant increased cost for benefits and greatly reduced income from taxation. This financial imbalance surely must have a major impact on ordinary people. For example my mother told me that when my grandfather was unemployed 90 years ago he was told that since his brother was working he would get no dole.
    Should the govt be freezing the benefit changes that occur April 1st? I could survive a freeze on my super; I have a relative getting WFF and accomodation allowance – should their increases be frozen along with the minimum wage increase? Should income tax rates be increased? Or is the benefit to the NZ economy worth the cost and effectively the govt just prints more money? Or does the govt just borrow more money and how is that possible if all countries are doing the same?


    • all fair questions. some answers on offer this afternoon, but key framing perspective is that the economy will be perhaps 20% smaller for an indeterminate time, and those losses have to allocated/shared somehow.


  4. What I found most curious was fixing the OCR for 12 months. How absurd. No one has any idea what the domestic (or global) circumstances will be over the next 12 month period. I suspect they’ll be eating those words. And then secondly, I don’t think it makes any sense whatsoever to announce a delay of the new capital requirements regime – my understanding is it isn’t to be fully implemented for 7 years anyway. What difference/help do they expect that to make in the near term?

    Following this move by them, my first thought was: best buy another house. Exactly the type of behaviour they don’t want to incentivise.

    But generally, I do sort of agree with them in that monetary policy has been rendered ineffective. Begger thy neighbour got everyone in the end.


      • Yes, and I think this time the drop will be deeper and the return simply won’t happen within a 30 year mortgage term anyway. We may well get to the 3-4x income ratio again.


      • With interest rates close to zero? House prices unlikely to drop in Auckland. 2008 collapse was engineered by the RBNZ where they pushed too hard on interest rates which hit 8% to 9%. Quite different scenario. But those dependent on Air BnB in provincial towns are going to hurt. Not so much in Auckland. Likely we will see what we had before 2 separate regions. Auckland as one region rising and the rest of NZ falling.


      • What impact is anticipated from the return of overseas Kiwis? If they are not entitled to unemployment benefit in their current country of residence I assume they will return. Many will bring money with them and many will not. Or am I concerned about something insignificant?


  5. Near zero: US Fed announces second emergency rate cut

    The US Federal Reserve cut interest rates for the second time in less than two weeks on Sunday (local time) in another emergency move to help shore up the US economy amid the rapidly escalating global coronavirus pandemic.


  6. Well it certainly looks like the property investment spruikers game is likely to be tested.
    Even when the pent up demand is still there it is hard to see that land banking will not take a multi year bath.


  7. Well it certainly looks like the property spruikers and land bankers will take a multi year bath.
    The reassessment of risk profiles for investment in residential real estate is certainly needed. It is unfortunate it has to happen in this way but a good thing in the longer term.


    • So far so good for property. Rents fixed and locked in for 12 months at 8% rent increase.

      It is also an opportune time to take advantage of developing some of these Auckland properties into 2 dwellings under the Unitary plan that allows extra dwelling if 8sqm outside space is available per dwelling that is if any properties become vacant if builders have no work and become available. I was thinking about when I can vacate some of my properties to start development especially when rents are $500 a week.


      • Yeah,Right (Tui version)
        I presume this assumes enough finance is available when existing mortgage commitment plus newly added finance is covered by the capital value reduced by the effect of the newly risked market.


      • With 11 properties on fixed rents and falling interest rates. It all seems rather comfortable at this point anyway. Don’t forget the government does have $2.5 billion gong into rent accomodation supplements. That amount can only escalate if people start losing their jobs. Also the government will have to pour money into businesses to keep workers employed afterall they are the ones that locked down the entire country in the first place.


      • Don’t forget that 33% of NZ properties are completely debt free. 33% have less than 50% debt. So it is really only less than 33% of first home buyers and some other property owners that are really debt dependent. The property market is a lot more stable than what most economists might speculate.


      • 80% equity. Only 20% debt. Also won $200k lotto lucky strike recently and still on a $200k wage. Looks good so far.


      • “” $2.5 billion going into rent accomodation supplements “”. Isn’t it probable this benefit will be reconsidered by a govt in need of money to pay for hospitals and increased unemployment? I can imagine the four regional areas being changed to one – why incentivise the unemployed to stay in the cities if the only new jobs available are in replacing foreigners on work visas picking fruit?


      • Bob, not likely to want to put more people into cars. They have already put more people onto the streets and into cars than National ever did because they have pulled down thousands of Housing NZ properties to develop them into multi-units. Brave move because National did not want to do that tough decision. But the developments have been really slow progress. 3 years almost up and the new houses are not quite there to have any occupation. Just last year towards Christmas they vacated another couple of hundred in Mt Roskill alone. Some of these have become my tenants in Mt Roskill with the benefit of virtually guaranteed rents. The government pays the rent directly into my bank account bypassing the tenants banks account.


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