Analysis: RBNZ’s Unconventional MonPol Options. Interest Rate Swaps?

By Sophia Rodrigues

It’s been nearly two years since the Reserve Bank of New Zealand published a paper discussing a range of unconventional monetary policy options that it could use if the official cash rate fell to zero but so far it has not provided a clue on what its preferred tool would be.

This could change on March 10 when Governor Adrian Orr will give a speech and also publish a document on the principles around how it would assess and use unconventional monetary policy tool if ever needed.

In contrast to RBNZ, the RBA began publicly discussing about unconventional policy only in the last few months but has made its thinking fairly clear. Any quantitative easing would take the form of government bond purchase in the second market.

The RBA has also explicitly stated that a negative cash rate is “extraordinarily unlikely” and 0.25% is the effective lower bound for the rate.

There is therefore some anticipation about how much information Governor Orr will release on March 10, and whether we could get more insights into RBA’s thinking based on that.


Of the several tools discussed in the RBNZ paper, one tool that stands out is interest rate swaps purchase.

In New Zealand, interest rate swaps market is relatively large and liquid compared to the bond markets, and the swaps curve is the main benchmark curve for banks’ funding costs and borrowing costs for corporate.

Purchasing interest rate swaps would not only do the signalling job for the RBNZ that the OCR would be kept low for a prolonged period but it would also have an immediate impact on mortgage rates.

It will be interesting to see if the RBNZ shows a preference for this tool.


One interesting difference, as of now, between RBNZ and RBA is that the former hasn’t indicated resistance to negative OCR. Even the New Zealand Treasury appears to be of the view that the OCR could go as low as -0.35% -- its worry only being there is not much space left to go that level (the OCR is currently at 1.0%), compared to the global financial crisis when the total cut in the OCR was 550bps.

As far as large scale asset purchases go, both the RBNZ paper and the Treasury haven’t dismissed the idea of buying corporate debt apart from government bonds. On the other hand, RBA Governor Philip Lowe has clearly stated that the central bank has no appetite for outright purchases of private sector assets.

The NZ Treasury has expressed reservation about fiscal risks with large scale asset purchases because it would require a big expansion in assets held by the RBNZ and the crown would have to cover any balance sheet losses.

The Treasury also appears to be uncomfortable with the broader impact on financial stability from large scale asset purchases.

Purchasing foreign assets is another option suggested by the RBNZ which could be used if the main aim is to put downward pressure on the exchange rate.

The RBNZ discussed targeted term lending as one of the options but even this may not be a preferred option given this would also create risk for its balance sheet.