NZIER Shadow Board Experts Look For Signals From Reserve Bank Regarding The End Of Its Bond Purchase Program – As Well As When Interest Rates May Be Raised


Business leaders, academics and economists this week are seeking firm leadership from the Reserve Bank on the future of its “money printing” – officially known as the large-scale asset purchase program ( LSAP).

And they’re also looking for advice on potential future interest rate hikes.

The RBNZ’s latest monetary policy review, Wednesday, July 14, is not expected to include a hike in the official exchange rate – but there could be a better idea of ​​when that could start to happen. More relevant though, before the OCR is moved there would need to be a resolution on the LSAP program, launched last year and through which the RBNZ could buy up to $ 100 billion in bonds by next June. (2022). OCR has been at an all-time high of 0.25% for over a year now.

Economists from the country’s four largest banks now everyone thinks RBNZ’s first rate hike will take place in November of this year.

Although there has been no official word on the RBNZ’s LSAP program, its purchases slowed down right away. It has purchased around $ 53 billion so far and will clearly not hit that $ 100 billion figure by June 2022.

Before each RBNZ monetary policy decision, NZIER creates a “Shadow Board” academics, economists and business leaders giving their opinion on what the RBNZ should do.

Inflation, the need for a tighter monetary policy and the need to address the LSAP program are recurring themes in the comments of the members of the “council”.

One of the more interesting suggestions for the RBNZ comes from Motu and Victoria University scholar Arthur Grimes – a former president of the RBNZ – who actually suggests that the RBNZ should start offloading some of the obligations. that she bought.

He says interest rates are “currently too low” in the face of mounting inflationary pressures, both international and domestic, and should be increased.

“Monetary policy needs to be set with a perspective of 3 to 6 quarters ahead and potential inflationary pressures indicate that tightening is warranted. In addition, bonds should be resold in the market to reduce liquidity.”

Stephen Toplis, head of research at BNZ, says: It would be difficult to officially tighten monetary policy at this point given the position the RBNZ released in May in its latest monetary policy statement. In this, he predicted the first increase in OCR in the second half of next year.

“A tightening bias”

“… But it can certainly move the rhetoric towards a tightening bias. A clear indication that the LSAP program could be scaled back sooner than what is currently postulated would also be appropriate. We maintain our long-held view that the RBNZ must raise its cash rate sooner rather than later. With others now coming to this conclusion, it might help RBNZ follow this course of action. Before raising rates, however, it would be appropriate to moderate more formally the LSAP program, ”Toplis said.

Viv Hall, a professor at Victoria University, says inflationary pressures continue to rise, as do inflation expectations.

“There is some evidence that these may not be temporary. So hasten the LSAP rollback and don’t expand the FLP. Modest upward movements in OCR are expected to follow in 2022.” [FLP refers to the Funding for Lending programmed introduced last last year by the RBNZ to give banks access to cheap funding.]

Business NZ Managing Director Kirk Hope also notes that inflation expectations continue to rise “for a variety of reasons (mainly supply side issues), but the Reserve Bank is in a difficult position as to when to move on to higher interest rates “.

“While there are risks in pulling the trigger too soon as New Zealand’s economy is still very vulnerable with the slow roll-out of the COVID-19 vaccination program, waiting too long risks causing considerable damage by having to increase rates considerably, especially since household debt is at an all-time high. “

Kiwibank chief economist Jarrod Kerr said the Reserve Bank was already scaling back its LSAP program, “with very little reaction in the rate markets.”

Take off needs more time

“Taking off for OCR requires a little more time and thought. We plan to take off from May next year. Still well ahead of all the other major central banks. We need to see how inflation evolves through 2022 after the “transitional” surge in inflation costs that we are currently experiencing. We need to see how the labor market behaves, how wages react and how long it will take to open our borders further to workers, students and tourists. In short, we have a lot of time to wait and evaluate.

MYOB’s customer service manager, Jo Tozer, said that for small and medium-sized enterprises (SMEs) growth remains “quite limited”, with MYOB’s latest Business Monitor showing that more than a quarter (27%) s ‘expected their profitability to drop in the last quarter.

“After the risk of further Covid-19 closures, maintaining stable revenue is the biggest challenge local SMEs expect this year. Although they are also concerned about the impact of the rising house prices on consumer confidence and their ability to attract staff to their area, reducing consumer spending as a potential consequence of rising interest rates is the biggest risk for SMEs to the current time.

“In the longer term, the situation is more balanced for SMEs. Rising inflation is now a concern, and will likely increase as inflationary pressures increase. However, the majority relying on bank overdrafts, credit cards, and personal or mortgage loans on the family home as the primary source of business finance – and with interest rates, overall cost and capacity making repayments the biggest concern regarding small business finance – it is important to recognize that local SMEs are also vulnerable to interest rate hikes. “

Boffa Miskell chief executive Kerry Gupwell said it was ‘time to start tightening things up’, subject to what happens with Covid, continuing to cut LSAP and taking a closer look at the OCR as inflationary pressures continue to rise.

“Concerns continue to grow over supply shortages (labor and materials) which, in my opinion, are holding back growth and putting pressure on margins that could lead to price increases.”

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