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MNI INTERVIEW: RBNZ Running Out Of Ammo -Ex-Deputy Governor

The RBNZ may be unable to provide additional easing despite economic weakness, its former deputy governor Grant Spencer tells MNI.

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Government measures to curb the housing market and a lack of bond issuance are limiting policy options for the Reserve Bank of New Zealand, which is likely to be forced to taper its quantitative easing programme but keep rates steady despite persistent economic weakness, a former RBNZ deputy governor told MNI.

Grant Spencer, who left the central bank in 2018 after 11 years, said in an interview that recent subdued growth and inflation data meant there were "no red flags being waved telling the RBNZ to take their foot off the monetary policy any time soon."

Gross domestic product slipped by 1.0% in the last quarter of 2020, while inflation was running at an annual 1.5% in the Jan-March period, in the lower half of the RBNZ's target range of 1% to 3%, after consumer prices rose 0.8% from Q4.

The economy could need more stimulus, Spencer said, but a lack of government bond issuance was limiting the central bank's Large-Scale Asset Purchase program, which is meant to purchase up to NZD100 billion in public debt by June 2002. The RBNZ is now "constrained", with "limited ammunition," he said.

The view at the Bank is different, with current deputy Geoff Bascand telling MNI in March that the RBNZ still has plenty of tools at its disposal. Former chief economist Sharon Zollner told MNI she thought the economy needed no more stimulus.

The RBNZ's decision to buy no more than 60% of outstanding bonds, to maintain the health of the secondary market, meant some degree of tapering of the QE program was likely, according to Spencer.


The RBNZ has so far purchased around NZD55 billion under the programme, versus the NZD130 billion in circulation, according to Treasury data.

Healthy tax receipts, and a rapid rise in the ratio of government debt to GDP, which has jumped from just over 20% before the pandemic to around 50% today, is also limiting further bond issuance.

"If the RBNZ stick to their commitment they will be looking to taper off their QE," said Spencer, now an Adjunct Professor at the School of Economics and Finance at the Victoria University of Wellington. "The ceiling might be more like NZD70 or NZD80 billion now on the LSAP."

Nonetheless, the RBNZ will be reluctant to cut official rates, which have been at a record low 0.25% for more than a year, because of the impact on the housing market which has gained 20% in a year.

"They don't want any headlines about exacerbating the housing crisis by cutting rates," he said.

The government recently introduced changes to capital gains tax and removed incentives for property investors in a bid to take the froth out of the market, while the RBNZ – which also has a prudential mandate – has increased loan-to-value ratios for investor loans from May 1.

The cumulative result is that while the NZ economy continues to need stimulus, the RBNZ is unlikely to move lower on interest rates even as its QE program tapers, Spencer said.