(Bloomberg) -- New Zealand’s central bank is taking another look at its strategy for unconventional monetary policy as its official cash rate looks set to plumb fresh record lows.
“This year the Reserve Bank has begun scoping a project to refresh our unconventional monetary policy strategy and implementation. This is at a very early stage,” the RBNZ said in response to an Official Information Act request for work on non-standard policy measures. It declined to release any of the information requested by Bloomberg on the grounds it could prejudice New Zealand’s economic interests. A spokesman said the bank had no further comment to make.
The RBNZ cut its benchmark rate to 1.5% in May and economists expect another reduction to 1.25% next month amid tepid inflation and slowing economic growth. Some predict the cash rate will drop to 1% by the end of the year, leaving the central bank with little ammunition in the event of a large economic shock.
The New Zealand dollar fell on the RBNZ’s comment as traders saw it as a sign that rates may stay lower for longer. The kiwi bought 67.33 U.S. cents at 4:20 p.m. in Wellington, down from 67.58 cents before the article was published.
“The announcement shows that the New Zealand economy is no longer immune to unconventional policy,” said Sandeep Parekh, a foreign-exchange and rates strategist at ANZ Bank in Auckland. “This should help take a bit of the heat out of the New Zealand dollar.”
The Treasury Department has also been looking at the sort of crisis measures that might be employed should the RBNZ exhaust its conventional policy armory. In a paper presented to Finance Minister Grant Robertson in January and later released under the OIA, Treasury suggests three non-standard measures would be available to the bank.
The first is taking the OCR below zero, which would amount to charging banks to hold funds with the RBNZ and therefore act as an incentive for them to lend. “However, the Reserve Bank expect rates could only fall at most 35 basis points below zero before risking the hoarding of physical cash,” Treasury says. “This will therefore only partially mitigate any large economic shock.”
The RBNZ could also conduct large scale purchases of either government or corporate bonds, known as quantitative easing, to lower long-term interest rates, or offer loans to banks below market rates conditional on them increasing lending, the paper says.
However, it says such measures are unlikely to fully deliver the desired results in a major downturn and the response “will likely require the targeted use of fiscal policy to support any unconventional monetary policy.” The department has a work program aimed at improving preparedness for such an event, which includes developing more detailed analysis of policy options and working with the RBNZ to ensure coordination.
Unlike central banks in Europe, Japan and the U.S., the RBNZ came through the global financial crisis without having to use unconventional policies. But with rates unlikely to reach pre-crisis levels anytime soon, it has acknowledged the need to have contingency plans in place should another crisis hit.
In a paper on unconventional policy published last year, the RBNZ canvassed five options. They were: negative interest rates, forward guidance, quantitative easing, term lending to banks, and purchasing interest-rate swaps.
“A small open economy like New Zealand often gets very little warning of downturns and conventional monetary policy has a lot less room to respond this time around,” ANZ Bank New Zealand economists wrote in a research note on unconventional monetary policy last month. “The time to prepare is now, just in case.”
(Adds currency reaction in fourth paragraph, strategist’s comment in fifth)
--With assistance from Ruth Carson.
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