The bank could sell $5-10 billion a year and there would be enough demand for it, he says
Reserve Bank of New Zealand (RBNZ) should probably start selling some of the $54 billion of NZ government bonds it acquired over the past couple of years, according to a BNZ senior interest rate strategist.
The move will help clear the decks should RBNZ decide to use bond-buying again in the future to lower interest rates in a future downturn.
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But because RBNZ can only sell the bonds it owns to Treasury, and Treasury doesn’t have enough cash to pay for a heap of purchases, the central bank would need to issue more debt to cover the cost, interest.co.nz reported.
RBNZ earlier said it wants to gradually downsize its bond portfolio. Larger bond issuances would put upward pressure on interest rates, which would be in line with the bank’s goal of tightening monetary policy to push down inflation.
In a research paper published this week, Nick Smyth said he believed RBNZ should start selling bonds to Treasury in the middle of the year.
Smyth said RBNZ could sell $5-10 billion a year. By selling $7 billion in bonds in the year to June 2023, he said Treasury would need to up its forecast bond issuance by the same amount, bringing Treasury’s forecast issuance back in line with where it was before December, when it slashed its debt issuance forecast for the year to June 2023 to $18 billion.
Smyth further maintained that there would be enough demand in the bond market to absorb the higher issuance, particularly if the bonds qualify for inclusion in the World Government Bond Index. It would make sense too, he said, for RBNZ to sell its longer-dated bonds, as those with shorter maturities are due to roll off its balance sheet soon anyway.
RBNZ will provide guidance on its bond portfolio early this year, possibly when it releases its next monetary policy statement on Feb. 23. Treasury is next due to revise its forecast bond issuance programme at the May budget, interest.co.nz reported.
