The Reserve Bank of New Zealand’s bond-buying programme, announced this week, is one of the two ‘big bazookas’ the economy needed, says economist Cameron Bagrie, of Bagrie Economics.

And the rescue package for workers and businesses hit by losses or redundancies is the other ‘big bazooka’ he says.

The Reserve Bank said its bond-buying programme “aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low.”

What does bond-buying do?

The lower long-term interest rates are, the better it is for borrowers, like people with mortgages, says Bagrie. However, of course, the lower the return will be on your investment.

“The way to think about bond-buying is that if your interest rates move up, that creates what’s called ‘tightened economic conditions’.

“What we’ve seen in the past week is that long-dated interest rates – five and 10-year bonds – moved up, so the Reserve Bank loosened economic conditions by cutting the official cash rate, but what they saw was that longer-dated interest rates moved up.

“So, what the Reserve Bank is doing by buying bonds is trying to force those longer-dated interest rates back down.”

Basically, we’re entering a credit crunch, he says, and the Reserve Bank is trying to offset that tightening crunch that we saw last week.

The kitchen sink

“With quantitative easing, we are literally throwing the kitchen sink at this thing,” says Bagrie.

The implications of these measures will be with us for the long term.

“Do we really want this? No. Do you want interest rates down to basically zero? No. Do you want the government to be borrowing billions and billions of dollars and writing out cheques for wage subsidies? No.

“Do you want the government to be writing out a $900 billion cheque to Air New Zealand? Hell, no, but we are undertaking all this as the reflection of the economic challenges we are facing on the other side.

“When you have extraordinary circumstances, we need to bring out extraordinary policy responses and that’s exactly what we’re going to do.”

We are in a recession

Bagrie says Kiwis have to face the fact that the economy is in a recession. “What are the depths and how long it will last, no one really knows.

“I would be remiss not to acknowledge and be open about the scale of the challenges we will be facing.”

He says Prime Minister Jacinda Ardern faces some incredibly tough tradeoffs.

“The more we shut the borders, and move people into self-isolation, the more immediate and harsh are the economic hits. Now, for six to 12 months, many people are going to lose their jobs.

“But you’ve got to have containment strategies, and the harsher the strategies have been, the more they’ve worked.”

Published 24 March 2020

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