The Reserve Bank (RBNZ) is increasing its bond purchases as financial conditions tighten and markets bet on rising inflation and interest rates.
The central bank plans to buy more New Zealand government bonds through its Large-Scale Asset Purchase Program (LSAP) this week than it has done every week for the past five weeks.
Her “indicative timeline,” published online, is to buy $ 630 million in government bonds in the secondary market this week – an increase from the $ 570 million per week she’s been buying since early February.
The tweak comes as bond yields in New Zealand and around the world rise (according to the Kiwibank economists chart below) and financial conditions tighten:
This is the opposite of what the RBNZ is trying to achieve with its monetary stimulus – that is, it cut the official cash rate to an all-time high and launched a worthwhile LSAP program. maximum of $ 100 billion and a loan financing program of up to $ 28 billion.
Importantly, RBNZ staff, not the monetary policy committee, are responsible for adjusting weekly bond purchases.
An RBNZ spokesperson confirmed to interest.co.nz that this is done for operational reasons and to keep the market functioning, and does not signal a change in the direction of monetary policy.
“Many factors will determine the amount of bonds purchased under the LSAP, including the size of the government bond market in June 2022,” they said.
RBNZ’s decision to increase bond purchases follows the Reserve Bank of Australia’s much more aggressive doubling of its purchases through its version of New Zealand’s LSAP.
However, the RBNZ is somewhat constrained by the fact that an indemnity provided to it by the Crown prevents it from purchasing more than 60% of the New Zealand government bonds offered.
Since the Treasury is issuing fewer bonds than it planned to issue when the LSAP launched last year, the RBNZ could hit that 60% cap before hitting the program’s $ 100 billion cap. .
In other words, he might have no choice but to slow down his bond purchases. Also, buying more bonds now lowers his option later.
ANZ Senior Strategist David Croy and Senior Economist Liz Kendall made these points in a memo they wrote last week.
They said that if the Monetary Policy Committee (MPC) wished to use the LSAP to more aggressively lower bond yields and therefore interest rates in order to boost inflation and employment in line with its mandate, the Committee would need an emergency meeting.
“If the MPC is concerned that yields have risen prematurely and could unduly weigh on the outlook, we would expect jaw-boning to be the primary method of influencing market interest rates,” he said. they stated.
“Intervention in the swap market is also a possibility, given the current lack of leeway to significantly scale up LSAP.”
However, Croy and Kendall said the MPC should be convinced it would work.
They said it would be easier for the RBNZ to intervene in the bond market by wearing its financial stability hat (rather than its monetary policy hat), using its rarely used bond market liquidity tool to remedy the situation. dysfunction of the bond market, for example.
They concluded: “Given the limited firepower of the RBNZ and the significant obstacles to action, it is difficult to see the RBNZ attempting to change the medium-term path of New Zealand government bond yields. , which are heavily influenced by management in particular, in the United States and Australia).
“Given the Federal Reserve’s apparent comfort with higher yields and the caution of the Reserve Bank of Australia, this shows that New Zealand bonds potentially outperform US Treasuries but underperform US bonds. Australian Commonwealth Government.