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

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