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REPEAT: MNI: IR Swaps Seen Key RBNZ Unconventional Policy Tool

MNI (London)
Repeats Story Initially Transmitted at 11:55 GMT Jun 18/07:55 EST Jun 18
--RBNZ Won't Wait Until OCR At Zero To Implement Unconventional Policy
     LONDON (MNI) - The Reserve Bank of New Zealand won't wait until the
official cash rate drops towards zero to implement unconventional monetary
policy and, if needed, one of its preferred instruments would be using interest
rate swaps, MNI understands.
     While lowering the OCR -- currently at 1.75% -- will be the first tool the
RBNZ would reach for if and when the need arises, it is not difficult to
envisage a situation where the conventional OCR would be cut at the same time as
unconventional measures such as interest rate swaps and asset purchases are
undertaken.
     If the RBNZ uses interest rate swaps for monetary policy transmission, it
would be the first central bank to do so. 
     A bulletin article published by the RBNZ in May discussed five
unconventional policy options that could be used to provide additional monetary
stimulus if the OCR reached zero. However, the RBNZ doesn't think the policy
rate needs to go all the way to zero before it would use those options.
     --SWAP CURVE
     Interest rate swaps are the RBNZ's preferred option of the five, where it
would buy swaps to influence broader interest rates in the economy. This
instrument would be particularly useful when there is a persistent upward
pressure on mortgage rates and, instead of making steep cuts to the OCR, the
RBNZ could use a mix of OCR cuts and swap buys.
     In New Zealand, the interest rate swaps curve -- where fixed interest and
floating rate payments are exchanged -- is the main benchmark curve for banks'
funding costs, and borrowing costs for corporates. 
     "Purchasing interest rate swaps could be a way to signal that the Reserve
Bank expects to keep the OCR low for a prolonged period. Swap rates comprise the
expectations of future policy rates, the term risk premium, and margin for bank
credit risk," the bulletin said.
     Given the swaps market in New Zealand is relatively large and liquid
compared to the bond market, the central bank believes it would be the most
effective instrument to influence interest rates.
     The notional value of interest rate swaps reported by the four largest
banks, as published in their Annual Reports for 2016, was NZ$1.88 trillion, with
a fair value of NZ$29.12 billion, the RBNZ bulletin noted.
     --NOT UNCONVENTIONAL
     In some ways, using interest rate swaps isn't strictly unconventional
monetary policy, as it would do exactly what the OCR does -- influence market
interest rates. 
     Interestingly, Adrian Orr, the RBNZ's new Governor, doesn't think even
infusing liquidity into the market via asset purchases is unconventional
monetary policy.
     In an interview with a local radio channel in April, Orr said, "Don't let
zero or low interest rates confuse with the ability of central banks to be able
to assist or provide liquidity.
     "They keep calling it unconventional monetary policy. I actually call it
traditional monetary policy ... conventional monetary policy is being able to
buy other people's assets and provide the liquidity ... to effectively airdrop
cash into the markets."
     --SWAPS PLUS ASSET PURCHASES
     Along with interest rate swaps, the RBNZ thinks it might also need to
conduct asset purchases. 
     In New Zealand, the debt market is dominated by government bonds and the
main constraint is the relatively small size of the New Zealand government bond
(NZGB) market, with outstanding issuance around 30% of GDP. The foreign
ownership of these bonds is also high compared to other advanced economies.
     Still, there can be two main benefits from asset purchases. A fall in
interest swap rates because of the policy signalling from the purchases and
downward pressure on the exchange rate if non-resident investors rebalance their
portfolio by selling the bonds.
     What is unclear is whether a reduction in the term premium on NZGBs would
reduce long-term interest swap rates, and it is here that the RBNZ's interest
rate swap purchases is expected to have a bigger impact.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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