RBNZ’s 50bp hike

The RBNZ increased the OCR by 50 basis points to 1.5% – to someone from three years ago that level might not sound strange, but just take a look at this 10 year government bond rate track. Highest 10 year rate since 2017 and, given when the cash rate is, an indication that higher average rates are expected in the future.

The last time there was a 50bp increase was May 2000. If you want to understand what was going on there take a look at inflation and the exchange rate during that period – a drop in the dollar was stimulating activity while inflation was high and climbing, so the Bank responded.

The exchange rate isn’t doing that now, but the world (and NZ) opening up post-COVID is filling that role – while core inflation is high, and headline inflation is at levels a lot of people have not seen before. In this way, the Bank is tightening – makes sense, and I trust they’ve worked it all though.

Ok, you have an angle here right – you always complain

Hmmm, there is one thing I was wondering. Tightening isn’t all about the cash rate, in the same way easing wasn’t all about reducing the cash rate – there was quantitative easing so where is the quantitative tightening (QT)?

This is a big issue overseas. The BoE has been signalling about it for a long time and discussing it in minutes, while now undertaking it. The US Fed is also undertaking it.

The RBNZ has announced adjusting their LSAP portfolio (which they’ve also well described here) through sales to NZ Treasury, but it has explicitly said it wants to do it in a way that doesn’t reduce monetary stimulus.

I don’t quite understand this. The BoE noted that it is using cash rate “triggers” to reduce its portfolio – ie. once the cash rate is 0.75 they start easing QT as at that level the liquidity rationale for the balance sheet intervention is largely gone. Once sufficiently unwound they return to increasing cash rates.

There should be some “equivalence” on the monetary stimulus side – where a given path of reductions in the size of portfolio holdings refers to a certain type of adjustment in short-term interest rates. In that way it would be useful to know what the “cash rate offset” associated with QT is, and to communicate that QT is indeed part of tightening monetary policy.

I don’t understand why this is explicitly being ruled out as a way of reducing stimulus – especially when other central banks are saying the opposite. However, this could just be me being dense – so if anyone has an explanation I’d love to hear it 😉

Side note

For economists out there – getting the balance sheet down is important for appropriate central bank independence, both from government and from the financial sector they are regulating.

Monetary policy should be an “offset” to other things hitting aggregate demand, that only has eyes on inflation and other demand related signals – taking more and more influence from government or retail banks about the amazing things they can do and intervene on leads to a situation where policy starts to favour these vested interest groups.

The lack of symmetry about the discussion of QE and QT screams to me that there are specific concerns from either government or New Zealand retail banks that might be influencing policy in a way that varies from this – and the Bank should stand up to that.

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