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LONDON (MNI) - The Monetary Policy Committee (MPC) has decided to implement
a Large Scale Asset Purchase programme (LSAP) of New Zealand government bonds.
The negative economic implications of the coronavirus outbreak have
continued to intensify. The Committee agreed that further monetary stimulus is
needed to meet its inflation and employment objectives.
Globally, the number of people infected with the virus has increased
rapidly and measures to contain the outbreak have become more restrictive.
Global trade and travel, and business and consumer spending have been curtailed
The severity of the impacts on the New Zealand economy has increased.
Weaker global activity is affecting the economy through a range of channels, not
just reduced trade. Domestic measures to contain the outbreak of the virus are
also reducing economic activity. Employment and inflation are expected to fall
relative to their targets in the near term.
In addition, financial conditions have tightened unnecessarily over the
past week, reducing the impact of the low OCR on achieving the MPC's mandate.
Heightened risk aversion has caused a rise in interest rates on long-term New
Zealand government bonds and the cost of bank funding.
The Committee has decided to implement a LSAP programme of New Zealand
government bonds. The programme will purchase up to $30 billion of New Zealand
government bonds, across a range of maturities, in the secondary market over the
next 12 months. The programme aims to provide further support to the economy,
build confidence, and keep interest rates on government bonds low.
The Committee will monitor the effectiveness of the programme and make
adjustments and additions if needed. The low OCR, lower long-term interest
rates, and the fiscal stimulus recently announced together provide considerable
support to the economy through this challenging period.
Record of meeting: Monetary Policy Committee (MPC) 20-22 March 2020
On Friday 20 March the Chair of the MPC spoke with the external members of
the MPC by phone to update them on the Bank's financial stability activities and
the interaction with monetary policy. These activities were public. The external
MPC members were made aware of what the other members of the Committee were
involved in with regard to the Bank's ongoing support to financial market
functioning and stability.
The Chair and the external members also discussed the fact that any further
monetary stimulus provided by the Bank would likely be through the purchase of
government bonds in a Large Scale Asset Programme (LSAP). All MPC members were
also made aware that monetary policy recommendations were being sent to them for
a decision soon, and that there would likely be an ongoing series of Bank
monetary and financial stability actions as the economic impacts of COVID-19
MPC members received papers on Friday evening containing staff advice about
the ongoing deterioration in the economic situation relating to COVID-19.
The initial view of staff was that an MPC decision on their recommendations
would be preferable by Sunday 22 March 2020. On Saturday 21 March, following
advice from the Reserve Bank's financial markets team as to their operational
and legal readiness to implement a LSAP, the MPC Chair called for an MPC
decision to be made by email. An in-person meeting was seen as unnecessarily
risky given current official guidance about social distancing.
There was agreement amongst members to proceed in this manner and by Sunday
morning there was a consensus MPC agreement to:
Provide further monetary policy stimulus through a Large Scale Asset
Purchase (LSAP) programme of New Zealand government bonds in the secondary
market. The initial scale of the LSAP programme is up to $30 billion of
government bonds, across a range of maturities, to be purchased over the next 12
months. Communicate the decision on the morning of 23 March. This decision was
made in response to staffs' briefing material to the committee indicating the
increasing severity of the economic situation and deterioration in financial
It was noted that the Government's fiscal package announced on March 17 has
delivered significant spending stimulus in addition to the monetary stimulus
announced on March 16. However, the health and safety measures announced by
governments over prior days - related to the reduction in travel and large
gatherings globally - would add to inflation and employment falling below target
in the near term.
Returning inflation and employment to target over the medium term will
require support from monetary policy. How much stimulus will depend on how the
COVID-19 pandemic progresses and the actions to abate the virus.
The committee considered a range of scenarios, and it was apparent that in
light of the evolving situation more stimulus was needed.
Committee members' attention was drawn to the tightening in financial
conditions over the past week. Interest rates on long-term New Zealand
government bonds had risen significantly, affecting the cost of wholesale
funding for any banks accessing the market at this time. Such increases mean
that the reduction in the OCR announced on March 16 was not effectively passing
through into interest rates faced by borrowers. The depreciation in the exchange
rate had helped ease conditions at the margin but not sufficiently.
The staff briefing material also included updates on global economic
developments and other countries' economic policy responses to the pandemic.
Committee members were advised that the recommendation of a $30 billion
LSAP program reflected a current assessment of the maximum effective stimulus
achievable while maintaining a well-functioning government bond market. Staff
noted the importance for liquidity to remain in the bond market and for multiple
Staff recommended that purchases up to $30 billion should be spread over at
least 12 months and across a range of maturities, in order to leave enough
liquidity for the New Zealand government bond market to function effectively.
And that the Bank's communications should emphasise that the LSAP programme
would provide confidence and support for the government bond market, and
monetary stimulus through keeping longer-term interest rates low.
Members noted that the exact amount of stimulus needed is difficult to
quantify, and that the range of economic scenarios they had seen were consistent
with a need to deliver significant stimulus.
Briefing material also included information about the implications of an
LSAP program to the Reserve Bank's balance sheet, and about the governance
arrangements in place between the Reserve Bank and the Minister of Finance. It
was noted that MPC agreement would be sought if further stimulus was needed to
be provided, either by increasing the size of the LSAP programme, or through the
use of other instruments.
The Committee reached a consensus to:
Approve a programme of Large Scale Asset Purchases to a total volume of $30
billion of NZ Government bonds over 12 months Delegate to staff the
implementation decisions of the LSAP programme Communicate the program in terms
of the total volume to be purchased Participants:
Reserve Bank staff: Adrian Orr, Geoff Bascand, Christian Hawkesby, Yuong Ha
External: Bob Buckle, Peter Harris, Caroline Saunders Observer: Caralee McLiesh
Secretary: Gael Price
--MNI London Bureau; +44 203 865 3829; email: firstname.lastname@example.org