While the Official Cash Rate is still the preferred tool to influence monetary conditions in extreme events like the Covid-19 pandemic, the Reserve Bank\u2019s chief economist says there\u2019s always going to be a need to have the option of large scale asset purchase (LSAP) programmes.\u00a0<\/p>\n
\u201cOnce that Official Cash Rate hits its effective lower bound, where it can\u2019t go any lower and that might slightly be negative – you can have a negative Official Cash Rate but not massively negative. So there will always be an effective lower bound. [So] we think there\u2019s always going to be a need to have LSAPs in the toolkit of the Monetary Policy Committee for extreme economic crises such as the pandemic,\u201d Reserve Bank (RBNZ) chief economist Paul Conway says.\u00a0<\/p>\n
Conway’s comments on Wednesday follow his speech on the use of alternative monetary policy tools at a Citi Australia & New Zealand Investment Conference.\u00a0<\/p>\n
Alongside the speech, new research was released which assessed the costs and benefits of the LSAP<\/a>\u00a0used in 2020 and 2021 as monetary policy stimulus after the OCR was cut to a record low of 0.25%.<\/p>\n The LSAP programme<\/a>, or quantitative easing (QE), saw the Reserve Bank buy about $53 billion of Government and local government bonds from private investors to lower long-term interest rates and support borrowing during the pandemic. This decision was widely criticised<\/a> after the Bank hiked rates to fight inflation, crystallising losses<\/a> on its bond portfolio of roughly $10.5 billion.<\/p>\n Conway says it did cost a lot in terms of mark-to-market losses from the LSAP programme. Mark-to-market losses are unrealised accounting losses that happen when the current market value of an asset goes below its original purchase price.<\/p>\n \u201cSo the Reserve Bank bought the government bonds at scale to provide additional monetary policy stimulus once the Official Cash Rate hit its effective lower bound. And what I will say about those losses is that they\u2019re very easy to quantify and they\u2019re very easy to see \u2026 But the benefit of LSAPs is harder to see and harder to get a handle on.”<\/p>\n I think one of the most obvious benefits that you can see is that LSAPs kept wholesale financial markets operating over the pandemic,” he says.<\/p>\n \u201cWhat we find is LSAPs, as pretty much anticipated by the Monetary Policy Committee at the time, they did lower longer term interest rates which got the currency to depreciate a bit more than it otherwise would. And they did generate additional economic activity which in turn, did stimulate tax revenue for the government.\u201d<\/p>\n Conway says once those broader effects were taken into account, the increase in tax revenue largely offset those mark-to-market losses.\u00a0<\/p>\n \u201cI should say this is based on one model. This is just where we\u2019re at. It\u2019s not the last word, but it\u2019s where we\u2019re at.\u201d<\/p>\n When asked if the central bank would consider LSAPs in the future if there was another pandemic-like event, Conway says \u201cthat\u2019s absolutely where we\u2019re at currently\u201d.<\/p>\n But LSAPs are not a day-to-day thing, he says.\u00a0<\/p>\n \u201cYou don\u2019t just reach for your LSAPs when you want to stimulate your economy. You use the OCR for that. But in extreme conditions, our research to date shows that there\u2019s clearly a need for having the capability to do LSAPs.\u201d<\/p>\n Conway says LSAPs weren\u2019t a perfect tool for monetary policy as there\u2019s issues, for example, with the effect they have on inequality in an economy, but; \u201cwe think, on balance, we need to keep them in the toolkit for extreme macroeconomic turbulence\u201d.\u00a0<\/p>\n Reflecting on the research, he says he’s pleased to get it out.<\/p>\n “The Covid response from fiscal and monetary policy was large. It was a full on economic storm … It’s really important that we review what happened and evaluate our actions and figure out what we do differently next time around.”<\/p>\n \u201cI don\u2019t know if we\u2019re going to have a pandemic anytime soon, but it\u2019s a volatile global economy out there currently,” he says.<\/p>\n In terms of international comparison of central bond bank purchases over the Covid-19 pandemic, New Zealand was “well below the OECD average”, he says.\u00a0<\/p>\n “It was also the first time we’ve used quantitative easing in New Zealand so this is consistent with what I was saying before – we think it has a place in our toolbox for specific circumstances of extreme economic turbulence.”<\/p>\n