Reserve Bank Governor Adrian Orr during his appearance at the Finance and Expenditure committee at Parliament. Photo / Mark Mitchell
Reserve Bank Governor Adrian Orr during his appearance at the Finance and Expenditure committee at Parliament. Photo / Mark Mitchell
Some of the world's economic bigwigs are considering whether banks should be forced to help taxpayers cover some of the costs of money printing.
Money printing done in response to Covid-19 saw central banks pump a huge amount of liquidity into the financial system.
This inflated banks' reserves, or theirsettlement accounts, with their central banks.
New Zealand-registered banks and other financial institutions now have a total of $55 billion in their settlement accounts with the Reserve Bank of New Zealand (RBNZ).
Before the RBNZ embarked on $71b of money printing in response to Covid-19, banks had around $6b to $8b in these accounts.
He estimated that reducing the interest rate the Bank of England pays on some of its bank reserves could save it the equivalent of around 1.4 per cent of its gross domestic product (GDP) a year over two years.
The RBNZ declined the Herald's request to share its view on the issue.
Its policy is to pay banks the official cash rate (OCR) on their settlement balances.
If the OCR rises from 3.5 per cent to 5 per cent, and reserves remain at $55b, the RBNZ will need to pay banks $2.8b over a year.
So, reducing the interest rate the RBNZ pays on a portion of banks' balances could save it hundreds of millions of dollars a year.
The banking experts the Herald spoke to believed making the change was doable but feared the risks would outweigh the benefits.
Former RBNZ deputy governor Grant Spencer, who is now an adjunct professor at Victoria University, and former assistant governor John McDermott, who heads up Motu Research, worried lowering the interest rate paid on some of the banks' balances could end up stimulating the economy.
If banks don't get much for keeping cash parked up at the RBNZ, they could be incentivised to invest that money elsewhere.
This could hamper the RBNZ's efforts to cool inflation.
Experts are considering ways of reducing the cost to taxpayers of money printing. Photo / Getty Images
Those looking at the situation from a bank's perspective – ANZ senior strategist David Croy and former Westpac treasurer, turned consultant, Jim Reardon – had the same concern.
They worried lowering the interest paid to banks could undermine the RBNZ's efforts to lift interest rates across the economy to tighten monetary conditions.
Nonetheless, Michael Reddell – a former RBNZ senior staffer, and Raf Manji – the leader of The Opportunities Party who used to work in investment banking and raised concerns about money printing in early 2020, believed banks could be paid less interest without this impeding the RBNZ's inflation fight.
Reddell argued the important thing was ensuring banks were still paid the OCR on a large enough portion of their reserves.
If the unintended consequences could be mitigated, Manji supported taking a bit of cream off the top of banks' revenue streams, noting their inflated reserves demonstrate they didn't end up needing as much support as they received from the RBNZ.
Banks are still being supported by the RBNZ via its Funding for Lending programme.
While the RBNZ is now unwinding the largest part of its money printing programme – its Large-Scale Asset Purchase (LSAP) programme – it will until December keep lending banks money at the OCR via its Funding for Lending Programme.
While the interest rate banks must pay on these loans is rising, the programme is still giving banks relatively cheap funding. The RBNZ didn't want to stop the offering when it was clear it was no longer necessary, because it wanted to stick to its word and keep it in place for two years.
Coming back to Reddell, while he believed the RBNZ could pay banks less interest on their reserves, he was opposed to singling out banks and effectively taxing them in principle and in practice.
He said that if one was of the view that banks should pay more towards the Covid-19 recovery, the corporate tax rate should be lifted.
Banks' settlement accounts with the RBNZ are expected to shrink as the RBNZ spends the next five years selling down the bonds it printed money to buy via its LSAP programme.
This will of course reduce the amount of interest the RBNZ has to pay.
McDermott was adamant the damage was done; the RBNZ printed too much money and is downsizing the size of its balance sheet too slowly. This is costing taxpayers.
McDermott believed it would be too risky for the RBNZ to try to mitigate the pain by trying to do something "cute" with the interest rate paid on banks' reserves.
Reardon and Spencer noted the European Central Bank is in a different position to the RBNZ.
For example, it has been lending money to banks through a mechanism similar to the Funding for Lending Programme since 2014.
Reardon questioned what would happen if the RBNZ went out on a limb and targeted banks and it didn't work.
Spencer concluded there was no clear-cut way of reducing the cost to taxpayers of the RBNZ's money printing.
As has been previously reported, the RBNZ can't cover these costs alone, so is making use of a guarantee the Crown provided it in early 2020 for any losses incurred by its LSAP programme.
This total cost is currently forecast to hit $9b over five years, but could be higher if interest rates rise more than expected, and vice versa.
The RBNZ has printed $55b via its LSAP programme and nearly $16b via its Funding for Lending Programme, which is still going.
RBNZ governor Adrian Orr in August acknowledged to the Herald the RBNZ overcooked its response to Covid-19. He regretted the fact inflation is now very high.
However, he believed the benefits of money printing were worth multiples of the $9b direct cost.
For example, all that stimulus helped financial markets function smoothly and supported economic growth, which kept people employed and boosted the Government's tax take at a time the economy was expected to tank.
The RBNZ in the coming months is expected to publish a review of the way it's conducted monetary policy over the past five years.
