Media questions for RBNZ Governor Adrian Orr. 28 March 2024. Bonds, interest rates, RBNZ balance sheet. RBNZ MoU with Minister of Finance.
More unanswerable questions for the Gov'nor.
Emailed 28 March 2024.1
[Note: the terms “interest rates”, “rates” and “bond yields” are used here interchangeably.
Most of the bonds the RBNZ purchased in the LSAP programme discussed below are local government bonds (=debt), which is why your rates are going up. Though this is being blamed on infrastructure failure. Good propaganda always has an element of truth.
The bankers have you all ways. Through both central and local government. Happy days.]
Dear Governor Orr or spokesperson
On 18 March 2024 the General Manager of the Bank for International Settlements (BIS, sometimes called the 'Central Bank of Central Banks'), Agustín Carstens2, gave a speech at the Center for Financial Studies, Goethe University, Frankfurt. In that speech (https://www.bis.org/speeches/sp240318.htm) Carstens said
"But the days of ultra-low rates are over."
QUESTION 1.
Does Governor Orr agree with the General Manager of the BIS?
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The RBNZ balance sheet (https://www.rbnz.govt.nz/statistics/series/reserve-bank/our-balance-sheet) is currently showing a large bond holding, acquired in 2020/2021 under the LSAP programme, which has already lost significant New Zealand dollar (NZD) value since the RBNZ bought them; the NZD losses seen in the bond yield increases evidenced since late 2020.
Though about 40% of the bond holding acquired under the LSAP programme is now off the balance sheet (sold at a loss, covered by the NZ taxpayer - see below), there is still a large holding.
The RBNZ has a Memorandum of Understanding (MoU) with the Minister of Finance, in place until 2025, but with the option to renegotiate, which protects the RBNZ from losses. These losses are protected in the MoU in the form of an indemnity. This leaves the New Zealand tax payer to pick up the bill for the losses already experienced.
If the General Manager of the BIS is correct, and "the days of ultra-low rates are over" is borne out by events, the value of the RBNZ's existing bond holding, which has already suffered large losses, will collapse further.
QUESTION 2.
If the General Manager of the BIS is correct does the Governor expect the Minister of Finance to demand this MoU be renegotiated, so the New Zealand taxpayer does not pick up the inevitable further heavy losses for these bonds which were acquired only because no-one else would buy them?
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QUESTION 3.
Under the RBNZ's repurchase agreements (aka repos), does the RBNZ repurchase bonds at the market price (aka marked to market) or at the higher maturity value?
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QUESTION 4.
Given the extremely high RBNZ balance sheet, does Governor Orr believe the RBNZ has the financial muscle to enter the market to suppress bond yields?
QUESTION 5.
If the answer to QUESTION 4 is 'no', will the RBNZ go to the Minister of Finance to request another MoU to indemnify the RBNZ over the inevitable losses when the RBNZ tries to suppress bond yields, or is the current MoU indemnity sufficient to cover the RBNZ for these losses?
QUESTION 6.
Will the RBNZ seek to negotiate another MoU with the Minister of Finance with the same or similar terms* as the 2020 MoU when the 2020 MoU expires in 2025?
* These terms essentially ensuring the New Zealand taxpayer pays for the (inevitable) loses and the RBNZ keeps the profits (in the extremely unlikely event there are any).
Thank you for your time.
Craig Hutchinson
See also:
Lower interest rates getting closer - Reserve Bank Governor Adrian Orr - 28 March 2024. Radio NZ
Whoops. I forgot to include Agustín Carstens’ name in the email. No matter, the RBNZ knows who I mean. I’ve added it to this post (a few hours later) for clarity.