The impact of the crisis on
Monetary policy
Credit Suisse
Asian Investment Conference
Hong Kong
25 March 2010
Grant Spencer
Reserve Bank of New Zealand
Impact of the Crisis on Monetary Policy
• Pre-crisis monetary policy
• Post-crisis monetary policy
• Role of prudential policy
The pre-crisis experience
• NZ monetary policy tighter than
overseas
• Domestic impact reduced by inverse
yield curve
• Pressure on exchange rate through
carry trade
NZ borrowers took advantage of inverse
yield curve
Percent
As at March 2007
8.5
8.0
NZ
7.5
7.0
6.5
6.0
5.5
US
5.0
4.5
4.0
90 day
1y
2y
3y
4y
5y
7y
10y
NZD pressured by carry trade
Foreign holdings of NZD securities grew
rapidly pre-crisis
NZD (Billions)
Breakdown of net outstanding NZ dollar fixed income securities held offshore
80
70
Financial
Crisis
Eurokiwi Bonds
Uridashi Bonds
60
50
Corporate Debt (Bonds and CP)
Kauris
Govt Securities
40
30
20
10
0
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Impact of the Crisis on Monetary Policy
• Pre-crisis monetary policy
• Post-crisis monetary policy
• Role of prudential policy
Post-crisis expectation
• Price stability still the appropriate target
• Monetary policy to have more kick
• Likely to be reinforced by Prudential
policy
“Flexible inflation targeting” passed
the oil shock test in 2008
Annual %
%
6
9
8
5
7
4
6
5
3
4
Policy Target Band
2
3
2
1
Annual CPI inflation
1
Official Cash Rate (RHS)
0
Mar-06
0
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Monetary policy impact will be enhanced
• Higher bank cost of funds
• Reduced asset price expectations
• Positive yield curve
Bank funding costs up 120-130bp
Percent
Indicative marginal funding costs relative to the OCR
9
8
7
Cost of funds
20-30 bps
over OCR
6
'Extra' deposit costs (55%)
5
Cost of funds
150 bps
over OCR
Long-term wholesale (15%)
Short-term wholesale (30%)
4
3
OCR
Note: Weights assume banks are raising funds in proportion to
the existing structure of their liabilities. The composition
of funding at any particular time will vary from these weights.
2
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
Pushing up lending margins over OCR
Demand side factors have also reduced
the “neutral” OCR level
• Lower house price inflation
• Reduced debt appetite
• Tax measures mooted on housing
NZ yield curve now positive
(borrowers have nowhere to hide)
Percent
8
March 2007
7
6
5
Current
4
3
2
90 day
180 day
Bank bill rates
1yr
2yr
3yr
4yr
Swap rates
5yr
7yr
10yr
Impact of the Crisis on Monetary Policy
• Pre-crisis monetary policy
• Post-crisis monetary policy
• Role of prudential policy
Monetary policy to be reinforced by
prudential
• New prudential liquidity policy a
stabilising force
• RB exploring other macro-prudential
options
• Caution warranted on macro-prudential
New prudential liquidity policy
(starts 1 April 2010)
Liquid assets
Stable funding
• One week mismatch ratio to • Core funding ratio: at least
be met by primary liquids
65%, moving up to 75% by
mid 2012
• One month mismatch ratio
to be met by primary and
secondary liquids
• Secondary liquids include
bank paper up to specified
limits
• Core funding = customer
funding (weighted by
deposit size) plus market
funding > 1 year to maturity
Core funding ratio has been cyclical
Core funding ratio
(% of loans and advances)
A cautious approach to macro-prudential
• Few realistic options for active management
• Need to keep prime purpose clear: Financial
system stability
• Potential to reinforce monetary policy on upcycle (asymmetric)
• Potential efficiency costs if pursued too
aggressively
End of presentation