Measure what is measurable, and make measurable what is not so

Late last year a (long ago) former Reserve Bank economist closed down his blog just like that. I didn’t have anything quite so dramatic in mind.  But after my elderly mother died last August, I got to thinking about the next stage in my life and how I could best use what skills and talents I have.  And before Christmas I’d decided that today would be my last day of high-frequency blogging.  Why today?  Well, for all practical purposes it is the fifth anniversary of the blog; five years today since I left the Reserve Bank.  It wasn’t that I’d run out of ideas or energy, but there is always the opportunity cost to consider, and I’d begun to map out a series of archival-research-based projects (mostly in New Zealand economic history) I wanted to pursue, as well as making more space for some other interests and priorities.   I’d planned to keep writing here perhaps once a week or so.

That is still what I want to move towards at some stage.  But in the middle of the most dramatic economic developments, and wrenching dislocations of economic policy, of our lifetimes it doesn’t quite seem the time to change course just yet.  We’ll see how things go, but for now, quite probably for at least the rest of this year, normal service continues (and in the meantime thanks to all of you who’ve become readers –  numbers that, for a fairly geeky New Zealand focused blog, I never imagined – and to (almost) all who’ve commented, either on the blog itself or directly to me).

And today I’m indulging the inner geek.

One of the most frustrating (to me) aspects of the response to the massive economic dislocation by the government and the Reserve Bank is their utter complacency, bounded by some deep-seated conventional wisdom, that interest rates can’t, shouldn’t, and won’t move down from here –  the OCR having been cut, in the biggest slump in modern history, by a mere 75 basis points.    The Minister of Finance was at it again in his testimony to the epidemic select committee yesterday highlighting the “certainty provided” by the MPC’s commitment not to change the OCR for some considerable time.  I presume he had in mind the idea that the MPC wouldn’t raise the OCR – as if anyone has supposed such increases were at all likely in the foreseeable future –  but he seems totally uninterested in the idea that considerable relief could be provided, and desirable income rebalancings achieved, with much lower interest rates.

Sadly most of our media also seems more interested in channelling conventional wisdoms rather than challenging them.  So I’ve heard MPs and journalists ask the Minister of Finance about commercial rents, but never once about interest rates, even though commercial rents are based on private contracts, whereas the OCR –  which influences a wide range of variable private interest rates – is directly under official control.   If the Reserve Bank refuses to act –  as it appears they do –  the Minister has existing statutory powers to simply override them.  They aren’t powers that should be used lightly, but they were put in the Act for a purpose, and these are pretty extreme times.  If the Minister refuses to use his powers, he makes himself directly party to the choice to hold New Zealand retail interest rates well above where they should be at present.   All while facilitating/encouraging firms and households to take on more debt at these interest rates.

Still, for the time being at least, the MPC’s floor is the floor, and markets have to take that into account in pricing other securities.  This has been an issue in a variety of other markets for some considerable time, particularly since the last recession when various central banks got a point where they were simply not willing to cut further, no matter the economic conditions, or to make the changes (around physical currency) that would have made further deep cuts –  of the sort Taylor rule estimates in the US, for example, suggested economic conditions warranted –  effective.   Central banks fell back on trying to do what they could –  often not much –  with other “unconventional” instruments.

And years ago, a Reserve Bank of New Zealand researcher Leo Krippner, got interested in the question of how one might represent the effectiveness of such policies in a single number.  Whereas in normal times, the OCR itself readily expresses the stance of policy, if there is a self-imposed floor on the OCR but other things are being tried, how best to express the overall stance of policy.

Leo is an expert in yield curve modelling, and got to try to estimate how different the interest rate yield curve was –  especially in the US –  in the presence of the floor on the Fed funds rate, as a result of unconventional policies (“QE”, loosely).     He has published various technical papers in journals, but I think his first paper in the area was published in 2012 in the Reserve Bank’s Analytical Notes series.  I was the editor of that series, and one of my priorities was to ensure that as much as possible was accessible to intelligent lay readers, and my impression is it still remains a good introduction to the work Leo is continuing to do and to update.

One can think of a yield curve of government bond interest rates (from overnight out to, say thirty years) as, broadly speaking,  a series of market implied expectations about the future setting of the official overnight interest rate (the OCR in New Zealand).  All else equal, if the central bank sets a floor on the OCR –  which is regarded as binding and credible – markets pricing say a 10 year bond will rule out any chance of an OCR below that floor, and the 10 year bond rate will be higher (all else equal) than it would be in the absence of such a floor.  On the other hand, if large scale bond purchases by the central bank –  even actively targeting a bond rate (as Japan and now Australia are doing) –  may succeed in lowering to some extent where the bond yields settle, relative to the floor-constrained normal market price.    Leo’s work, calculating what he calls a Shadow Short Rate, attempts to combine the OCR and this effect into a single number.

This work wasn’t very relevant to New Zealand itself for a long time (there were internal sceptics as to whether it should even be done)….and yet now it is. (In his speech a couple of weeks ago the Governor even suggested the Bank might publish a semi-official series of such a measure.)   Leo’s work has been recognised in various places abroad –  cited in public by at least one Fed Reserve president, and honoured by the house journal of the central banking community, Central Banking magazine (for whom I do some reviewing: my light lockdown reading is here).  Leo left the Reserve Bank last year, but is continuing to update his work and earlier this week circulated a note with a Shadow Short Rate series for New Zealand, now that we operate with a formal OCR floor and in the presence of the MPC’s commitment to buy $30 billion of government bonds over the coming year. (The quote that heads this post, from Galileo, appears upfront in Leo’s note.)

Leo’s modelling estimates that the overall stance of monetary policy is “approximately equal to an OCR of -0.48 per cent”, compared to an OCR itself of 0.25 per cent.    If so, that suggests a small but somewhat useful contribution from the “unconventional monetary policy” or UMP.  Small because even a total of 150 basis points of effective easing is tiny by comparison to the scale of the economic shock.

There are a number of caveats to this modelling.  Leo articulates some of them himself

  1. The SSR is an estimated value rather than a setting like the OCR or an observed market short rate. Hence, any SSR series will (unavoidably) vary with the model specication and data used for its estimation. The choices I have made for the SSR series in this note have produced more favorable properties than alternatives for the United States,4 but the magnitudes of negative SSR estimations can easily vary by fractions of a percentage point on re-estimations, and sometimes more for UMP periods if the lower-bound setting in the model needs revisiting in light of central bank communications and/or actions. My model for New Zealand currently uses a lower-bound setting of 0.25%, consistent with the RBNZs 16 March 2020 forward guidance.
  2. Related to estimation, in the present global UMP environment compared to previous years (e.g. for the United States easing/tightening cycle) yield curves may no longer capture sufficient information to quantify the stance of monetary policy. The reason is that yield curves in New Zealand and around the world are now very at(i.e. longermaturity rates are close to shorter-maturity rates). Only time (and updated analysis) will tell on this aspect, and model refinements may be needed.
  3. The SSR is not a market rate at which borrowers and lenders can transact, particularly in UMP times when the OCR and short rates will remain close to zero while the SSR may become increasingly negative. Hence, SSR declines in UMP times will not result in the same cash flow effects from interest payments and receipts as OCR cuts in CMP times, so the SSR transmission to the economy may differ from at least that perspective.

I went back to Leo and asked about how safe it was to use a floor of 0.25 per cent for New Zealand (after all, we’ve seen more than a few policy lurches from the Reserve Bank over the last year, in fact over the last few weeks, and some other central banks have – eventually –  shown a willingness to take their policy rates lower, in the Swiss National Bank’s case as low as -0.75 per cent.  Leo noted that if one were to assume the New Zealand floor was anything like that low, the SSR for New Zealand would still be much the same as the OCR itself.

He went to say (with his permission to quote)

The longer answer is: should one use an assumption of the effective  lower bound in the model (perhaps something like your -0.7, but also  see further below), or should one use a value that central banks have  indicated they would go to? Across the different economies I’ve  modeled, I’ve noticed that the different yield curves seem to use the latter. For example, the US yield curve data has pretty much respected  the lower point of the 0-25 bp range, and the euro area data (OIS  rates) has pretty much respected the incremental settings of the ECB  policy rate. In particular, neither have had longer-maturity yields  rush to, say, the -75 bps of Switzerland.

So, based on what I’ve seen with the data, I set the lower-bound for  each economy according to the central bank’s indications. And then I  lower that if/when the policy rate gets set lower (which, again, seems  to be how the yield curves behave – perhaps not rational though, I agree).

To which my response in turn was to note that in at least some of those overseas central banks –  the Fed in particular –  the stated floor has been consistently applied for a decade, while the Reserve Bank of New Zealand has no track record in this area at all –  indeed in that same speech a few weeks ago the Governor was openly talking of negative rates as a possibility.  A rational investor in the current climate, with a Governor prone to lurches (and, actually, in the presence of override powers), might not price in a 100 per cent chance of the MPC sticking to its word.  Time will tell.

My bigger unease about this work, stretching all the way back to that 2012 paper (where I recognise a couple of sentences I insisted on being added) is the third in Leo’s own list of caveats above: the SSR is not a rate that can be transacted, and if much of borrowing and lending in an economy is either at (or swapped back to) or very close to a floating rate, the actual OCR (self-imposed constraint and all) will be a lot more important than the SSR estimate might suggest.  In the US, for example, a lot of mortgage lending takes places at very long-term fixed rates (and so what happens to very long-term bond and swap rates has a direct transmission mechanism).  That is much less so in New Zealand (or Australia or the UK).  That is consistent with some of the doubts I’ve expressed in earlier posts around quite what difference the Bank’s large scale asset purchase programme really makes where it matters (thus, on my telling, the main advantange of that programme is that it should reveal quite quickly how severe those limitations are and turn the focus back on the OCR and that self-imposed floor).

This stuff won’t be everyone’s cup of tea, but I’m really glad to see that Leo is continuing with this work –  he says he will provide updated estimates on his website each month for the time being –  and will be interested to see whether the Reserve Bank follows through on the suggestion of a quasi-official series (for what its worth, I would suggest they not do so, and use work such as Leo’s as a reference point for commentary/research when it is relevant).

36 thoughts on “Measure what is measurable, and make measurable what is not so

  1. Australian 1-3y fixed rates are 2.09% . No main bank fixed rate is below 3% despite NZ having the same OCR as Australia. NZ baNks are holding deposit rates too high.. yes lower rates will mean some cash goes to the stock market but with this massive uncertainty the bulk will remain safe in the banking system. NZ households and businesses are at a significant disadvantage to those in Australia.


    Liked by 1 person

  2. Michael
    A silver lining to all this. We are to continue to receive your missives on a relatively frequent basis.
    I confess to finding yield curve analysis a bit dry.
    Given Thomas Piketty’s whole world view seems to be based on a 5% real return on capital (and a positive spread relative to real GDP growth), a bit more on that would be interesting.
    If the RB is virtually guaranteeing that the risk free return is 0.25% for a couple of years, what does that mean for the average return on capital?


    • On your final question, I guess the 10 year bond rate is a better risk-free metric isn’t it. Probably still held up by the RB actions, but less so and less directly. Presumably to sign off any investment project just now you would need a prospective return hugely in excess of the typical risk premium. But if we look ahead two years, and bond yields are still v v low, the average return on capital, and hurdle rates, will also have slumped further (esp if, as seems likely, this crisis does not spark a fresh wave of pro-productivity reform; more likely quite the opposite).


  3. You had me worried with your first paragraph. Now, more than ever, we need independent and impartial analysis and critique. The shuttering of North & South and the Listener etc (not that I read them) may be just the beginning of a reduction in media diversity and the consequent narrowing of thought in NZ. So a big thanks from me.

    Liked by 3 people

    • Yes the first paragraph worried me too. This blog is satisfying for a spectrum of readers – from geeky economists to the interested layman (layperson? is there a gender neutral word?). Mr Reddell’s obligation should be his fellow geeks but I’ll put in a plea for maybe a weekly article for the rest of us.

      I’m concerned about the lack of media diversity too; it is ever easier to find international newspapers online but something authoritative specific to NZ is desperately needed and our TV channels certainly provide nothing. I will miss the Listener and North & South – never bought them but always worth browsing at the library.

      I’m halfway through a video lecture about Quantum Dynamics and it is as easy to understand as today’s article.

      Incidentally – despite all the comments on recent previous articles I’m bothered that the discussion has been only about how the govt for the best of reasons spends money like a drunken sailor and nothing about who eventually pays for it. Do we follow Venezuela and Zimbabwe into hyperinflation or are we creating a debt for our children?


      • Bob

        There is a realistic prospect that a generous approach now done well could add 40-50 percent of GDP (pre crisis) to the public debt. That would take debt not too far above where it was 30 years ago. Then we have a choice. We could stabilise debt at that level (still less than in quite a few OECD countries pre crisis). More likely, we would seek to reduce the debt ratio. Even if the budget were simply balanced, 2% annual real GDP growth would roughly half the debt ratio over 35 years. Personally, I’d favour something going a bit faster and further, but it need not involve swingeing tax increases over hte longer-term, esp if we use the opportunity to eliminate low quality spending (views on that will differ, but I include fees-free tertiary, the recent permanent changes to business tax and benefit rates, and NZS at 65 for people like me (shift it to 68 over, say, the next six years).


      • I concur with your suggested savings and would add public service wage freeze for those earning over the living wage.
        Your reply is almost soothing and I’d be persuaded if this epidemic was NZ specific. Other significant countries had large debts before this crisis – how will they manage and will their difficulties impact us? NZ 2% real GDP growth – how will that be achieved with probable reduced tourism and international education?
        It is my gut feel against your informed expertise; I retain my forebodings. What did economiists anticipate in Jan 1930? This time next year things will be clearer.


      • I’m still calling for a 20 per cent wage cut, esp for the public service (most of whom face little job loss risk).

        It is fair to be concerned (and in answer to your question in 1930 the downturn often wasn’t seen as anything out of the ordinary). Much may depend on how serious we are about making the current largesse temporary and distinctly one-off.

        If it is any useful context, we went into the Depression with public debt of 170% of GDP and came out of WW2 lower than that, and generally had among the highest living stds in the world throughout.

        Fair question re 2%: I’m assuming that 10 years hence there will be lots of tourism again etc, and that our political appetite for immigration won’t dissipate completely. Key point really tho is that , say, 70% of GDP debt is not itself ruinous.


  4. I just checked Kiwibank and their variable rate is still 4.4% and their 6 months fixed rate is 5.04% standard and 4.29% special. Looks like the interest rate reductions haven’t even hit my own mortgage at the last interest payment.


  5. If the banks aren’t able to handle a negative OCR, is there any reason why the OCR can’t be set to 0.01 or is merely convention that has the OCR set at 0.25 increments?


  6. 1a. Ardern said $4.5 billion has been paid out to 750,000 people through the wage subsidy scheme.
    1b. Amendment to yesterdays data

    2a. Ardern is “gutted” to see Bauer media close its doors. She said the Government wanted to see the company continue to operate, maybe with more online presence.
    2b. NZ has transformed it’s ethnic make up, 40% of whom have not adopted NZ’s love affair with chick-lit literature. Even the on-liners are pleading for donations.


  7. Michael, I hope you do continue your blog, but I readily understand that the competing demands on your time and opportunity costs might cause you to reduce the frequency of posts. While I do not agree with all of your arguments, I do appreciate the intellectual efforts and time you have devoted to your blog. You have provided a rare and much-needed vehicle for holding the RBNZ and wider government to account, and have helped to promote thoughtful insights into many issues. I commend you for this. New Zealand discourse on economic policy issues would be much the poorer without your perceptive contributions.


    Liked by 4 people

  8. History of the pending gloom

    Five years ago I stood outside the Eastern portal to the Homer Tunnel. There is an information board at the opening describing the origins of the tunnel, when it began, and the people involved. Many destitute men found their way to the construction site, desperate for work in the years immediately after the 1930 depression. They lived in tents in hostile conditions of snow and ice and blizzards and avalanches. It was a tent village. Unlike Twizel and Karapiro which had villages. A number died.

    The sense of destitution of the depression is not conveyed in contemporary publications nor the poverty that drove the men there


  9. I do enjoy your blog and it is the most influential blog as far as the RBNZ, Treasury and dare I say it, a check on our government whether led by Labour or National and its coalition parties is concerned. It would be a great loss to the country if you stop blogging.

    We have our differences but it is the technical debate and analysis that challenges decisions or the lack decisions that is missing from media and from our powerful institutions.

    Thank-you for this opportunity to debate and to air our concerns.

    Liked by 1 person

  10. We need more on -line interviewing. Peer to peer is over the heads of most people. You can’t trust the MSM, they would just interview Shamubeel Eaqub. In the 90’s there was a good program on economics. It described (among other things) how the ratio of lambs to tractor (price) had increased).

    Liked by 1 person

  11. In the late 19th century and early 20th century, immigration to New Zealand could be seen as reflecting a favourable shock to the tradable sector. Opening up new lands to production, falling transport costs, refrigerated shipping combined to lift the population capacity of New Zealand while still offering high wages and high rates of return.

    By the middle of the 20th century, New Zealand was settled and producing, and technological change in the key export sectors was no longer as rapid (relative to other producers). The factor price equalisation justification for strong population growth had dissipated, yet population growth remained high. Across the OECD, there is some evidence that rapid population growth in post-war advanced countries was associated with an apparent cost to per capita growth rates.

    Then Labour: Ethnicise society (one world culture managed by experts: “how do we do diversity”) and National


  12. I read your blog daily at the recommendation of Stephen Franks. I’m most certainly a layperson and I struggle with plenty of the geeky stuff…but it’s good to ‘go high’ and I’m more informed as a result of your articles and the comments section. Much more. As it happens I’m also a Listener subscriber, some 38 years, and a gutted one today. Blimmin ‘eck, what next?! Pleased you’re hanging in there at this peculiar time. Thank you.


    • Thanks. Yes, shame about the Listener, altho it has a pretty strong brand so I hope in time someone will pick it up and reopen. Apart from anything else, as my wife put it “how will I know what is worth watching on TV?”

      Liked by 1 person

  13. Please consider that there are many outside New Zealand (in India specifically) who go through your blogs with great interest and draw some perspectives from your writings. If you blog once a week or a fortnight, it would be much appreciated.


  14. Hi Michael,

    Five years went fast! Really apreciate the big effort this takes and glad we will get to read your high frequency views/thoughts for a while yet. You definitely help people like myself, who are overseas, keep up with the sharp-end of the NZ policy debate. I don’t agree with everything you write but most imortantly you continue to challenge my/established thing.

    One thing I don’t agree with you on is negative rates. Its still relatively early days in the use of negative interest rates and i think the best we can say for now is the evidence is far from conclusively positive. Its hard to tease the impact of negative rates out from other structural issues, but Europe’s experience does not look positive. There is some literature emerging on the “reversal interest rate” – the level of interest rates where the costs on depositors, banks, and longer term financial stablility begins to outweigh the positives of norrmal transmission mechanisms like cashflows and asset prices. Its telling that both the RBA and Fed have basically ruled out negative interest rates.

    All the best


    • Thanks Peter

      I guess my scepticism about the reversal rate stuff is that it has been in the context of experiments with v modestly negative rates. There probably are psychological thresholds in the public mind re negative retail rates, which may not be worth banks crossing for say 10bps.

      But whether that interpretation of recent experiences is also applicable to say an ocr of -500 bps is prob where the focus shld be.

      Re the other central banks, yes but then all central banks in 1930 wanted to defend their gold parities…..until they didn’t.

      Anyway, thanks for the comments.


  15. Thank You Michael, very pleased you’re going to stick with it.
    Your headline reminded me of one of the lines from Leonard Cohen’s appropriately apocalyptic The Future. A part of it below:

    Things are going to slide, slide in all directions
    Won’t be nothing
    Nothing you can measure anymore
    The blizzard, the blizzard of the world
    has crossed the threshold
    and it has overturned
    the order of the soul
    When they said REPENT REPENT
    I wonder what they meant
    When they said REPENT REPENT
    I wonder what they meant
    When they said REPENT REPENT
    I wonder what they meant

    You don’t know me from the wind
    you never will, you never did
    I’m the little jew
    who wrote the Bible
    I’ve seen the nations rise and fall
    I’ve heard their stories, heard them all
    but love’s the only engine of survival
    Your servant here, he has been told
    to say it clear, to say it cold:
    It’s over, it ain’t going
    any further
    And now the wheels of heaven stop
    you feel the devil’s riding crop
    Get ready for the future:
    it is murder

    Things are going to slide …

    There’ll be the breaking of the ancient
    western code
    Your private life will suddenly explode
    There’ll be phantoms
    There’ll be fires on the road
    and the white man dancing
    You’ll see a woman
    hanging upside down
    her features covered by her fallen gown
    and all the lousy little poets
    coming round
    tryin’ to sound like Charlie Manson
    and the white man dancin’

    Give me back the Berlin wall
    Give me Stalin and St Paul
    Give me Christ
    or give me Hiroshima
    Destroy another fetus now
    We don’t like children anyhow
    I’ve seen the future, baby:
    it is murder

    Things are going to slide …

    When they said REPENT REPENT …


  16. Thanks for the blogging.

    It still seems a head scratcher that a negative interest rate is required to achieve some kind of short term equilibrium. The phrase (global) ‘debt overhang’ has perhaps become less frequent but lurks in the background – when does it make sense to recut balance sheets? Always a tough call and not ideal to do on mass but if reallocation is part of the productivity fix, no time like the present.


    • Re your first point, yes but it should be no different in principle to negative real rates (which we’ve had for a while) or even just interest rates below the rate of nominal GDP. People are transfixed by the minus sign, and probably shouldn’t be.

      On debt, well take NZ: in the Great Depression the total of public and private debt (subtracting out material double counting) was in excess of 300 per cent of GDP. 20 years later, even with a war in between, we were a v modestly indebted country (and fully employed). It can be done, altho I grant that without strong underlying productivity growth – and pro productivity policies – it is much harder to do at a global level than for an indiv country.


      • No monetary historian but appears more recent periods of nominal debt/GDP deleveraging has required an inflation nudge, which to your point, is a negative real rate in disguise (money illusions remain quite entrenched it seems). But, independent central banks that target 2% inflation – how to square that with inflating away debts is difficult but perhaps this regime is/will change.

        The BOE paper on ‘Eight centuries of global real interest rates’ was a good read – to the extent of my understanding, historical ‘capital accumulation’ has arguably put downward pressure on real rates which makes intuitive sense albeit the balance between debt and equity financing is a likely contributing factor…or not.


  17. As a result of your frequent advocacy of negative interest rates I’ve spend considerable time trying to get my head around it. The more I thought about it I wondered why inflation and deflation isn’t allowed to rotate around zero with an OCR of (say) +500 bps and (-)minus 500 bps. Why is inflation such a sacred cow? It certainly inflates away Government debt. Government’s must has made a bundle back in the 1980’s when inflation was running at 20% until the Paul Volcker shock happened

    I would be comfortable with a negative interest OCR of -500 bps. It would be preferable to see small oscillations between inflation and deflation with these acting as automatic stabilisers rather than shocks of 30% asset deflation in assets such as Kiwisaver.NZ and Compulsory Superannuation.AU and 401(k)’s in the US and businesses generally. The question arises as to what compulsion do retail banks have to follow suit with parallel cuts

    Had never heard the term “Reverse Interest Rate” until now. Reading about it , it makes sense. It had arisen in my contemplations in paragraph one above

    Wikipedia – Why do central banks want inflation?
    Why the Government Wants You to Expect Inflation. The central bank does this to make you believe prices will continue rising. It spurs the economy by making you buy things now before they cost more. Most central banks use an inflation target of 2%


    • Remember that inflation only inflates away govt (or private) debt to the extent that (a) the inflation is unexpected, otherwise the effect will be reflected in higher interest rates, and (b) not floating rate (ditto, the interest rate will pretty quickly adjust.

      The reason we all ended up with inflation targets centred near 2% rather than 0% is (a) there are biases in price indices that prob mean something like 0.5% inflation is closer to true price stability, and (b) because of concerns about deflation; two in particular. The first is about the lower bound on nominal interest rates (which I’m campaigning to get rid off) – NZ interest rates were always high enough historically we thought there was next to no chance of needing to have nominal int rates lower than zero. The second is about how labour markets in particular work. It is typically harder to cut wages when times are tough than it is to, say, not give an increase. So a target centred on, say, 2% has been seen as helping lubricate the system and support keeping as close to full employment as we can.

      I suspect that in semi-normal times central banks prob only needs perhaps 700-800bps of ability to adjust interest rates, but in this exceptional slump even more leeway would be desirable. As it is, of course, we’ve done 75bps and then the RB called a halt.


  18. Michael (also Peter Jolly and Antony)
    On the topic of negative risk free rates. Im extremely skeptical that a negative OCR or even negative NZGB rates would have positive consequence for corporate or household borrowing rates.
    My first home loan was taken out in 1982 just as Muldoon introduced all sorts of interest rate controls. I formed an abiding loyalty to NatBank because they said “yes” at a time when credit was rationed.
    Fast forward to today, BBB corporates would have been able to issue 5 year bonds in February to yield 2.5% and would now face 5%, not that any issuance is happening.
    Credit spreads, rationing and other factors such as inflationary expectations all play a part in how householders are wiling to save and at what cost households and companies have to borrow.
    RBNZ has done (I feel) an excellent job managing the government yield curve and maintaining bank liquidity. But the credit markets are a long way from starting up again and its not clear whether they are to be left to their own devices or will get the benefit of direct RB intervention.
    This really matters for the shape of the economic recovery. If companies cant borrow. Hoard cash. Don’t invest….. its going to be far from a “V” shaped recession, think more “L”.


    • Hi Tim

      Fair to be sceptical, but I guess my bottom line rejoinder is probably “what’s to lose in giving it a go?”, esp as the state currently has considerably leverage to achieve passthrough from a much lower policy rate to retail rates. A lot of the scepticism about negative rates has been about v marginal cuts that don’t try to break clear through the psychological barrier retail transactors clear have around zero.
      But also as I’ve noted in earlier posts, retail deposit and lending rates are still materially positive so we are still some way from even confronting negative retail mortgage rates or even negative term deposit rates.

      Agree the RB actions to date have limited the tightening in mon and financial conditions, but in an econ climate like this we should be looking at much looser conditions.


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