RBNZ announced QE on Monday, following an aggressive emergency rate cut, by -75 bps, to 0.25% last week. The surprising move aims at soothing the credit conditions which have tightened significantly over the past weeks. Besides QE, the central bank last week introduced a Term Auction Facility, FX swap and a NZ$30B US dollar swap line. Through ensuring funding of banks and to preventing a surge in the cost of bank funding, the measure aims at lowering borrowing costs of businesses and households.
Under the Large Scale Asset Purchase (LSAP) program, The central bank has planned to buy NZ$ 30B worth of New Zealand Government bonds over the next 12 months across the yield curve, as “financial conditions have tightened unnecessarily over the past week”. It added that “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”. Meanwhile, although “the depreciation in the exchange rate had helped ease conditions at the margin”, it’s “not sufficient”.
The QE program would make the central bank own about one-third of the government bonds on issue in 12 months’ time, similar size to other central banks’ QE programs. As noted in the accompanying statement, the program could “provide further support to the economy, build confidence, and keep interest rates on government bonds low”. RBNZ also pledged to “make adjustments and additions if needed”. While asset buying will span over the coming 12 months, we expect more buying will happen in 4-6 weeks, given the market conditions.
Concerning the Term Auction Facility, RBNZ will lend money to commercial banks over the coming 12 months. Government bonds, residential mortgage-backed securities, and other bonds are eligible collaterals. The facility would operate via auctions, offering terms of 3, 6, and 12 months. This is compared with RBA’s Term Funding Facility which offers longer tenor (3-year) funding to authorised deposit-taking institutions.