Coronavirus: Quantitative easing 'Massive' for economy - experts

NZD: $100 bills
The Reserve Bank's $30b Government bond buy-up is expected to provide cheaper funding for companies and financial institutions. Photo credit: Getty.

Following the Reserve Bank's announcement it will buy up to $30b of Government bonds over the next 12 months, financial experts are calling it "massive" and "huge" for the economy.  

As Government bond rates set a benchmark for interest rates, the large-scale bond buy-up is driving down the cost of funding for companies, lenders and borrowers.  

Kiwibank chief economist Jarrod Kerr said that the reason behind the bond buy-up was to provide liquidity to markets and get interest rates lower.

"The best way to do that is to take the Government bond curve - the benchmark for New Zealand interest rates - and slam it to the floor."

Referring to Monday's announcement as "massive", Kerr said that $30b is a "large chunk" of the Government bond market, which is only around $75b in size.

"With the Government stimulus, the bond market is going to grow to around $85b (probably more).  

"What the RBNZ has basically told everyone is: 'we're going to buy it' and we're going to keep buying it until interest rates are where we want them to be."

Last week, the bond market was "quite dysfunctional" with investors reluctant to buy and bond yields moving higher. An example was the interest rate on the 10-year Government bond jumping to 1.77 percent.

"Now the Reserve Bank has made the announcement, it's dropped to 95 basis points," Kerr said.  

As swap rates and bank funding rates are based on Government bond rates, they're heading lower.

"These rates are all lower today [and] this should provide some relief by way of lower interest rates," Kerr said.

Expecting the package to have "significant impact", ANZ Strategist David Croy said that $30b is "huge" - much larger than the amount the bank flagged was needed.

"This package is not just large in comparison to the number of bonds on issue, it's also larger than the Government's plan to issue or sell more bonds to fund that," Croy said

Considered to be a 'risk-free' investment, Government-issued bonds are typically purchased by banks, insurance companies and traders, and not all expect to hold them through to maturity.  

The Government funds itself by issuing bonds and the idea behind the Reserve Bank's announcement to buy in the secondary market is to get longer bond yields to fall closer in line with the Official Cash Rate. 

"We'd expect the entire term structure of the Government bond yield curve to come down and to flatten," Croy explained.

As longer-term rates come down more rapidly than short-term rates, this has a knock-on effect across the rest of the bond market and credit markets.

"As commercial banks issue bonds to fund loans and mortgages, as the Government bond yields go down, it makes it easier for banks and other corporates to fund in the market," Croy added.

Last Thursday (19 March), the bond yield on the 2037 bond increased to around 2.6 percent: more than 10 times the level of the Official Cash Rate.

"When you have 'risk-free' interest rates spiraling higher, something needed to be done," Croy explained.

In Monday's statement confirming its decision to put $30b into New Zealand Government bonds, the Reserve Bank said that as coronavirus cases had continued to ramp up, impacting the economy, further monetary stimulus was needed.

"Financial conditions have tightened unnecessarily over the past week, reducing the impact of the low OCR on achieving the MPC's mandate. 

"Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding."

As part of a large scale asset purchase (LSAP) programme, the Reserve Bank will buy up to $30b of New Zealand Government bonds across a range of maturities in the secondary market over the next 12 months.  

The central bank's aim is to provide further support to the economy, build confidence and keep interest rates on Government bonds low.

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