Financial sector under the microscope

The main market talking point in late March was the collapse of Silicon Valley Bank (SVB) and Credit Suisse. While the impact was felt around the globe – and New Zealand was no exception – the consensus seems to be that no radical path adjustment is needed.

CRAIG We have talked about the impact of natural disasters on the official cash rate (OCR). Do recent issues in the global banking sector that started with the collapse of SVB have any consequences for the OCR outlook?

RAYNER We have been monitoring global banking issues closely and are in regular contact with other central banks and regulators. We are confident that the banks we are responsible for regulating and supervising in New Zealand have sound liquidity and funding positions.

The recent global developments will be discussed in more detail in our April monetary policy review and financial stability report, published in early May. However, it is interesting to note that in recent days, following developments with SVB and Credit Suisse, the Federal Reserve and the Swiss National Bank have remained committed to combating inflation and have continued to tighten monetary policy.

Low and stable inflation is critical to the pursuit of our economic and financial stability objectives. There has been a slight tightening in credit conditions as a result of recent banking developments, which may affect the degree of monetary policy tightening required. But it is still too early to tell at this stage.

DODDRELL The Bank of England moved rates up 25 basis points, too – despite being the central bank that was closest to pausing or even lowering rates.

BOYLE After the Q4 GDP release, ASB Bank’s economists revised their OCR outlook due to the softer GDP number, global financial stability issues and financial market impacts – rather than the cyclone. As a result, they now expect the RBNZ [Reserve Bank of New Zealand] will tighten with less urgency. They now expect two 25 basis point rate hikes in April and May – rather than one 50 basis point hike in April – to a peak of 5.25 per cent.

BANERJEE What we are talking about provides an example of how financial stability and monetary policy – the different arms of the RBNZ – are so closely linked that it is not possible to separate them. Financial stability is an implicit objective of monetary policy, and these arms work together to maintain a sound and efficient financial system.

SWISS Are these developments changing the RBNZ’s thinking in other areas, for instance the pace or indeed the overall strategy of selling QE holdings back into the market?

RAYNER Going back to when the MPC [monetary policy committee] was considering whether to reduce the size of the large-scale asset purchase (LSAP) portfolio, it had three key objectives front of mind. These were to have minimal impact on the degree of monetary stimulus, of which the OCR was the primary tool, to avoid harming the efficient functioning of financial markets and to ensure the MPC had the capacity to use the LSAP tool in future if needed.

In considering whether “conditions have changed” to warrant a change in strategy, we keep a close eye on the functioning of the New Zealand government bond market, incorporating a wide range of quantitative and qualitative information.

At this stage, we haven’t observed a deterioration in market conditions that would warrant a change in the pace of asset sales. Measures of market liquidity have generally been in line with historical norms and market volatility has been consistent with international trends. We continue to monitor markets closely and keep the MPC informed.