ANZ strategist says QE has done its job, so Reserve Bank should cancel bond purchases before increasing OCR


The Reserve Bank (RBNZ) does not need to continue printing money to buy government debt.

Since the onset of COVID-19, it has been successful in removing interest rates and helping financial markets run smoothly by buying bonds through its quantitative easing or large-scale asset purchase program ( LSAP).

But buying bonds doesn’t do much anymore, and the RBNZ should better start preparing to exit emergency response mode.

That’s the (paraphrased) message from ANZ senior strategist David Croy.

He suggests that the RBNZ cancels its bond purchases every week to the point that it doesn’t buy anything again in September.

The market is able to absorb debt issued by the Treasury, without the RBNZ being a buyer of last resort.

Additionally, things could get confusing if the RBNZ continues to print money to buy bonds, while increasing the official exchange rate (OCR).

Croy argues that it would be best for the RBNZ to stop buying bonds, take a break, and then embark on tighter monetary conditions by increasing OCR – possibly as early as November.


Looking back, the RBNZ Monetary Policy Committee launched its LSAP program in March 2020.

In doing so, he pledged to be a very active player in the New Zealand government bond market to remove interest rates in order to stimulate inflation and employment, and prevent the market from falling. panicking at a time when he was inundated with new government bonds payable. the resumption of COVID-19.

The RBNZ has pledged to buy up to $ 100 billion in New Zealand government bonds in the secondary market (not directly from the Treasury) by June 2022.

To date, she has purchased nearly $ 53 billion in government bonds.

He reduced his weekly bond purchases to $ 200 million, down from well over $ 1 billion last year.

Croy suggests that the RBNZ cut that buying rate by $ 20 million per week, until it doesn’t buy anything in September.

RBNZ can keep some powder dry as well

He raises a technical but important point: by stopping the purchase of bonds, the RBNZ would not cancel its LSAP program before its end date.

Rather, the program would stay there, and the RBNZ could “print money” to buy bonds again, if necessary.

But since the bond market does not need the LSAP program at the moment, the RBNZ might as well keep some of its powder dry if the economy were to deteriorate in the future.

“In short, there is limited ammunition left; it’s not necessary right now, so it’s best to put it back in the bag, ”says Croy.

The bond market can handle it

He believes the market would not be overwhelmed by the Treasury continuing to issue a relatively large number of bonds for several reasons:

  • It has in fact not had to absorb a lot of debt to date, as the RBNZ has been there, buying around $ 53 billion of the $ 66 billion of bonds issued in the past 15 months (see chart below). -below);
  • The Treasury has just paid a large sum ($ 11.3 billion) for a bond that has matured;
  • There is a lot more money in the banking system than there was a year ago; and
  • The Treasury is expected to downgrade its $ 30 billion 2021/22 bond issuance program as the economy is doing better than expected.

Croy also suspects that cutting bond purchases would not significantly raise interest rates.

He notes that New Zealand government bond yields have “kept pace with US and Australian bond yields,” despite the RBNZ slashing the pace of its bond purchases while its overseas counterparts have largely cut back. avoided talking about reduction.

Another point raised by Croy is that the rise in banks’ use of an RBNZ bond lending facility could indicate that RBNZ is congestioning the market by holding so many bonds.

The graph below shows the increased use of the facility, which banks draw upon when they are short on a particular bond on any given day because they have sold it, on-lent it or failed to sell it. not expect an agreement to be reached.

Clarity is the key

Returning to the point made earlier around the RBNZ avoiding mixed messages in the way it deploys its monetary policy tools, Croy believes it will follow the path set by the US Federal Reserve in the wake of the 2008 global financial crisis. .

The Fed has indicated that it will slow down its asset purchase rate. He then published a document detailing the “principles” he would follow as he sought to “normalize” his balance sheet, before stopping bond purchases and raising its Fed funds rate.

Croy says the Fed has given markets many warnings about what it is doing and expects the RBNZ to follow suit.

RBNZ will have to continue to manage its big balance sheet

While Croy’s take-home message is that the RBNZ should cut back on its weekly bond purchases fairly quickly, it’s important to note that the RBNZ will likely be an active player in the bond market for decades to come.

Croy recognizes that even once the RBNZ stops “printing money” to buy bonds, it cannot necessarily allow its balance sheet to shrink at the rate that the bonds it holds mature.

RBNZ may need to reinvest at least some of the matured bond funds. It is simply a feature of quantitative easing. The RBNZ now has a much larger balance sheet that it will have to continue to manage.

The oldest bond she holds does not mature until 2041.


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