New Zealand - RBNZ unleashes full QE firepower - Capital Economics
Australia & New Zealand Economics

New Zealand – RBNZ unleashes full QE firepower

Australia & New Zealand Economics Update
Written by Ben Udy
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New Zealand is set to enter a near-total lockdown this week which will cause economic activity to all but stop. The RBNZ launched quantitative easing today, but we think that more monetary stimulus will be needed. We expect the Bank to cut the OCR into negative territory by year-end.

  • New Zealand is set to enter a near-total lockdown this week which will cause economic activity to all but stop. The RBNZ launched quantitative easing today, but we think that more monetary stimulus will be needed. We expect the Bank to cut the OCR into negative territory by year-end.
  • The number of coronavirus cases remains low in New Zealand compared to much of the world at just over 100. However, the pick-up in the pace of the spread of the virus has led the government to take unprecedented draconian measures. New Zealand will enter near-total lockdown for at least the next four weeks. All non-essential businesses and schools are to be closed. And we are assuming that the lockdown lasts in some form or another until the end of June.
  • Those measures will have an enormous impact on GDP. Production, manufacturing and sale of supermarket food will still take place, as will health services. But we estimate that around 80% of economic activity will cease over the next four weeks. We now think GDP will contract by 40% q/q in Q2. And while growth may bounce back in the second half of the year, output won’t return to pre-crisis levels until near the end of 2021. Indeed, we expect activity to decline by 15% over the whole of 2020.
  • In response to the increasingly dark outlook, the RBNZ has now joined a select club of central banks around the world which have implemented quantitative easing (QE). Last year the Bank indicated that negative interest rates would be its unconventional tool of choice if the economy was to deteriorate significantly. However, last week when the Bank cut rates to 0.25% it noted it was not yet ready to implement negative rates and large-scale asset purchases or QE would be the next step.
  • The Bank has stated that over the coming twelve months it will purchase $30 billion of government bonds, equivalent to more than 30% of the outstanding stock. Those purchases are far more aggressive than those implemented by central banks elsewhere in recent years. (See Chart 1.)
  • Indeed, the Bank noted that this is the maximum amount of government bonds it believes it could purchase while still maintaining liquidity in the bond market. The RBNZ’s decision should help to reverse the recent surge in risk-free rates that was triggered by fire-selling of financial assets. Indeed, 10-year government bond yields fell by more than 50bp after today’s decision. (See Chart 2.) The government also announced an expansion of its wage subsidies programme today which will now cover businesses of all sizes, including the self-employed.
  • While monetary and fiscal policy are now firing on all cylinders, more stimulus is likely to be needed. We expect the RBNZ to figure out how to operationalise negative interest rates in the coming months. We then expect the Bank to cut the OCR into negative territory as the forthcoming surge in unemployment will make it very difficult to meet its inflation and employment targets. We believe the Bank will cut the OCR to -0.75% by the end of the year.

Chart 1: Central Banks Holdings of Government Bonds (% of total)

Chart 2: 10-year Government Bond Yields (%)

Sources: RBNZ, Refinitiv, Capital Economics

Source: Refinitiv


Ben Udy, Australia & New Zealand Economist, +65 6595 1517, ben.udy@capitaleconomics.com

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