Monetary policy needs friends - Milford Asset

Monetary policy needs friends

Ian Robertson

Senior Analyst

Ian joined Milford in 2017 as a Senior Analyst focused on fixed income investments. He is the Co-Portfolio Manager of the Trans-Tasman Bond Fund & the Global Corporate Bond Funds. Prior to joining Milford Ian worked at ANZ Bank New Zealand, most recently in the Specialised Finance team originating, structuring and executing leveraged transactions. Before returning to New Zealand in 2014, Ian spent seven years at a UK fund manager as a Credit Analyst investing in European and US leveraged loans and high yield bonds. He has also worked on advisory, restructuring and formal insolvency appointments at PricewaterhouseCoopers in Auckland and London. Ian has a Bachelor of Commerce (Hons) majoring in Finance from the University of Auckland.

Despite a long period of supportive monetary policy post-GFC including low/negative interest rates and quantitative easing from some of the major central banks, inflation remains stubbornly below most central bank targets of around 2%.

As monetary policy tests its limits, the most recent rounds of easing from the European Central Bank, Reserve Bank of Australia and the Reserve Bank of NZ (RBNZ) have been accompanied by increasingly louder calls for governments to increase fiscal spend.

Here in NZ, the RBNZ’s most recent OCR press release mentions an expectation of fiscal policy lifting domestic demand over the next year and states “there remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives”.  But can and will the government deliver?

Earlier this month the government released its accounts for the year to June 2019.

Despite some one-off items overstating the headline surplus figure of $7.5bn, the underlying result was still a surplus of around half this and not out of context with forecasts.  Combined with net debt-to-GDP at 19.2% relative to the government’s conservative 2021/22 target of 20%, and it is hard to argue with Finance Minister Grant Robertson’s assertion that the government is in a “good position to meet the challenges of global economic uncertainty”, especially relative to many other parts of the world.

The accounts already show government expenditure is increasing year on year and, per the 2019 Budget, expected to continue to increase.  The RBNZ will be expecting this spending to flow through their forecasts, but it is perhaps capital spending on physical assets such as infrastructure where the government is slightly behind its own aspirations.  While government borrowing to fund capital projects will benefit from the low interest rate environment (10 year NZ government bonds currently yield slightly above 1% p.a.), there are potentially capacity constraints in the NZ economy that are delaying the deployment of capital funds, as well as the phasing of the longer lead times associated with such projects.

The government will be wary of the headroom to their 20% net debt-to-GDP target and the slowing NZ economy putting downward pressure on their existing forecasts, including the smaller $1.3bn surplus forecast in the year to June 2020.  We have also previously talked about the need for NZ to maintain some fiscal flexibility given the structural considerations of the NZ economy.  Pleasingly for the RBNZ, however, Robertson acknowledged “Fiscal policy has a part to play alongside monetary policy as we manage these challenging global economic conditions.”

Overall, relative to much of the rest of the world, the NZ government appears to have some capacity and intention to support the economy with greater fiscal spending.  With an election to be held by November 2020 at the latest, perhaps it is not unreasonable to expect announcements of further spending into the new year.

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