Reserve Bank says it is prudent to examine how such policies might work in New Zealand
There is qualified potential for “unconventional” monetary policies in New Zealand, according to the Reserve Bank of New Zealand (RBNZ).
In its latest bulletin, RBNZ examines the international experience of several central banks since the global financial crisis of 2007/08. Some of these central banks introduced what were then called ‘unconventional monetary policies’ to further ease financial conditions and provide additional stimulus for output and inflation.
RBNZ said these policies included negative policy interest rates, large-scale asset purchases, and targeted term lending to the banking sector.
According to the authors, Sarah Drought, Roger Perry and Adam Richardson, there is such potential for such policies in the New Zealand environment.
“Interest rates could likely be lowered into modestly negative territory, and targeted term lending facilities could be introduced,” they stated. “Asset purchases would also be effective. However, the structure and size of New Zealand’s financial markets could limit the overall scope of such a programme.”
The authors also found the exchange rate would likely play a more important role in easing financial conditions than was seen in the United States and in Europe.
Currently, monetary policy settings are stimulatory in New Zealand. With the Official Cash Rate (OCR) fixed at 1.75% and is projected to remain static for some time, RBNZ said it has significant further room to ease monetary policy in a conventional way, and conventional monetary policy remains effective in influencing inflation and activity.
“However, it is prudent to learn from other countries’ experiences with unconventional monetary policy and examine how such polices might work in New Zealand if the need arises,” the regulator added.
