INTERVIEW: RBNZ Should Cut Rates, Amend QE: Former Offic’l
(MNI) – The Reserve Bank of New Zealand must “throw everything
including the kitchen sink” to ease the economic disruption from the coronavirus
pandemic, including cutting cut rates to 0.1% from the current 0.25%, a former
Bank official has told MNI.
“They do seem to have ruled out going even lower out of concern about how
the system can cope with negative rates,” said John McDermott, a former
assistant governor and chief economist at the bank.
“That is fair enough, but why not move the Official Cash Rate down to 10
basis points, said McDermott, who left the RBNZ at the end of 2018 to work in
the private sector.
“This is still technically possible and avoids the issue of the system
having problems with negative rates.”
Trimming rates to 0.1% would mirror the actions of the Bank of England, who
for many years saw 0.25% as their effective lower bound for rates, before
amending their view in 2019 and cutting rates to the current level in March.
McDermott endorses the RBNZ’s current asset buying program, but says more
can be done, suggesting the central bank could buy Government bonds directly
from the issuer, the NZ Debt Management Office, rather than only in the
The RBNZ has announced a NZ$30 billion bond buying program and has said
this may need to be increased. This week the Bank also bought up NZ$3 billion in
local government debt.
Bond buying may need to increase to fund growing government deficits as the
economic impact from the virus grows. McDermott said growing debts and increased
issuance was immaterial now.
“This is not the time to hold back, because if you do you may have no
economy to rescue later on,” he said.
“The NZ Government has large fiscal headroom to manoeuvre with because it
is starting with a low debt position relative to GDP, so now is the time to use
The NZ Government debt to GDP ratio is currently just above 21%, low by
industrialized nation standards.
Private sector debt, he said, was more of an issue after a long period of
low interest rates, as many companies had taken on more debt and were now seeing
their income streams collapse.
McDermott is currently working with epidemiologists using data to model the
pandemic curve to assist the Government in making decisions on the economic
lockdown. He was “cautiously optimistic” that the pandemic had moved from the
state of exponential increase to linear increase.
Even a rapid re-opening of the economy, however, could not prevent long
term disruption to service industries such as education, tourism and hospitality
which may take years to recover.
The recovery in “goods based” industries such as agriculture, however,
could be limited to a matter of weeks if ports could open and begin exporting to
other countries which were also opening their economies.