MNI INTERVIEW: Rates, Not QE, Main Tool For RBNZ-Hawkesby

Interest rate cuts will now be the "go to instrument" for the Reserve Bank of New Zealand should the economy require more monetary stimulus, following technical changes at commercial banks making it possible to implement negative rates and given constraints on bond purchases, Assistant Governor Christian Hawkesby told MNI.

While last week's Monetary Policy Statement included a projection of a rate rise in September 2022, Hawkesby said there had been no major change to the RBNZ's outlook, and that the economy continued to require monetary stimulus to achieve targets for inflation and employment.

The Official Cash Rate has been at a record low 0.25% since March 2020, and the central bank has instructed banks to prepare for negative rates if necessary in the future.

But the Large Scale Asset Purchases programme, which has acquired around NZD55 billion of securities so far, would not reach its limit of NZD100 billion by June 2022, Hawkesby said in an interview on Tuesday, though he declined to reveal any estimate of its potential maximum size.

CONSTRAINTS ON QE

Constrained by the RBNZ's ceiling of purchasing no more than 60% of total outstanding government bonds, and also by smaller-than-expected public borrowing, the LSAP is"not going to be the way of signalling change in monetary conditions," Hawkesby said.

"We could do more harm than good to the functioning of the bond market if our LSAP program is too large relative to the size of the market," he said.

"It is unlikely we would be able to reach NZD100 billion, but the LSAP still has an important role to play in continuing to keep long term interest rates lower than otherwise."

Last year's "front-loaded" purchase rate in the order of NZ2 billion a week could not be sustained, he said.

"We are trying to calibrate it so it helps deliver monetary stimulus, while finding the sweet spot without disrupting financial markets in a way which inhibits the transmission of monetary policy," Hawkesby said.