Motu Executive Director and ex-RBNZ Assistant Governor John McDermott assesses the sate of the local and international economies as 2022 hurtles towards 2023
The Reserve Bank ought to move faster to offload the government bonds bought during its 2020-21 quantitative easing programme to unwind the distorted effect this has on the financial system, says John McDermott.
McDermott, Executive Director of economic and policy research institute Motu is also a former Reserve Bank Assistant Governor.
He says quantitative easing (QE) via the Reserve Bank's large scale asset purchase programme has proven problematic.
"I think we'll reassess history and decide QE turns out to be a really bad idea, apart from [during] the really emergency settings."
"Under normal times central banks should not be doing this and they should be repairing the balance sheet. Because QE just seems to find itself in asset markets. It moves equity markets up, it moves house prices [up], it creates other distortions in the economy that we really don't need to have. It creates all kinds of financial stability problems. QE has proved very dangerous. Maybe we should have it for just in case, but understand the cost of using it is much, much higher than we ever anticipated," McDermott says.
QE) is a monetary policy tool through which a central bank buys securities on the open market with the aim of reducing interest rates, increasing the money supply and bolstering economic activity. During 2020 and 2021 the Reserve Bank bought $53 billion worth of government and local government bonds from banks. It's now selling $5 billion worth annually to New Zealand Debt Management, the Treasury unit that manages government debt.
QE, McDermott says, gets into the financial system where it has to work through asset prices.
"So it has over inflated asset prices. It creates a distortion in terms of wealth distribution, it distorts business decisions, and it creates financial fragility in the system so everybody is over leveraged, there's too much debt in the system," says McDermott.
The exit strategy for central banks is tricky, McDermott adds, saying he hasn't seen any country do this well.
"The business model relies on keeping QE going. So I think we need to say that has not to be New Zealand's future, we don't want a distorted financial system. So it's important to reduce it before we get hooked on that really bad habit."
In the podcast he also talks about whether inflation has peaked, good and bad forward guidance from central banks, the sport of Federal Reserve watching, the need for New Zealand to have monthly Consumers Price Index inflation data, the state of the global economy, including China, the US and Australia, and the three things he'd be watching over summer if he still worked at the Reserve Bank.