Analysis: RBA, RBNZ’s QE; Same Starting Point But Different Purpose

• Published on
• 17 Mar 2020, 03:45 PM

By Sophia Rodrigues

The antipodean central banks have signalled their next monetary policy move is likely to be Quantitative Easing via purchase of government bonds but their purpose and design for this unconventional tool seems to be completely different.

The Reserve Bank of New Zealand’s QE is likely to be a big one, aimed at mainly providing liquidity boost while the size of Reserve Bank of Australia‘s QE may be a small one because it mainly plans to provide a price signal.

Because the RBNZ’s QE would be akin to large scale asset purchases it would buy bonds across the yield curve. On the other hand, the RBA is likely to focus on particular points in the curve because it would do yield curve control.

The RBNZ would also consider buying other assets while the RBA may not go beyond government bonds.

 It will be interesting to see if there will be some convergence by the time the two central banks make an announcement or perhaps once the tools are put to use.

QE AT 0.25% CASH RATE

On Monday, the RBNZ lowered the official cash rate by 75 basis points to a new record low of 0.25% and provided a forward guidance that the rate will be kept at this level for at least 12 months.

While 0.25% is not the effective lower bound for the RBNZ’s OCR, the central bank indicated that it would next buy government bonds if it needs to provide further monetary stimulus.

The Committee agreed “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,” the minutes of the RBNZ’s board meeting said.

On Monday, the RBA also made a few announcements, including that it stands ready to buy government bonds in the secondary market and would announce further policy measures on Thursday.

The expectation is the RBA would lower the cash rate to the effective lower bound of 0.25% and announce QE.

RBNZ’S LIQUIDITY AIM, RBA FOCUS ON PRICE SIGNAL

Governor Adrian Orr said on Monday that the size of QE would be “as big as is needed” and the RBNZ would buy bonds across the curve with the aim of providing significant liquidity impulse to the economy for monetary policy purposes.

“We would buy bonds ‘reasonably’ across the yield curve so as not to influence any one particular point of the yield curve.,” Orr said.

Assistant Governor Christian Hawkesby said the likely QE would be similar to the large scale asset purchases designed and implemented overseas, but altered to the nature of the New Zealand financial market.

Such assets could go beyond government bonds because the challenge for New Zealand is limited stock of government bonds.

RBA Governor Philip Lowe has signalled that the intention of buying government bonds would be to lower risk-free interest rates along the yield curve. This would have a direct impact on price of government bonds and also have a signalling effect through market expectations. The bond purchases is expected to reinforce the credibility of the RBA's commitment to keep the cash rate low for an extended period.

So for RBA, QE via government bond-buying would be a price and forward guidance tool. For the RBNZ, it is mainly a liquidity-infusing tool because its QE would be large scale asset purchases.

--Contact: sophia@centralbankintel.com