Reserve Bank pays Crown whopper $600m dividend, but there’s a catch

Reserve Bank Governor Adrian Orr argues the benefits of money printing far outweigh the costs. Photo / Mark Mitchell

ANALYSIS

The money-go-round between the Crown and Reserve Bank (RBNZ) has been escalating, as the cost of the central bank’s Covid-era money printing programme is realised and it builds a war chest of foreign reserves it could use in a currency crisis.

The RBNZ’s 2023/24 annual report, released on Tuesday, shows it paid the Crown a relatively large dividend of $597 million for the year.

Why? The RBNZ had more equity than it needed.

It received $1.8 billion of capital injections from the Crown at the beginning of the fiscal year, partly to back it up as it started buying foreign currency assets to enable it to intervene in the market in extreme circumstances.

The RBNZ also received higher returns on its investments, partly thanks to changes in New Zealand and overseas interest rates.

These factors enabled the RBNZ to pay a historically large dividend to the Crown, having not paid a dividend during the prior two years (the RBNZ’s financials are consolidated with that of the Crown).

The elephant in the room, however, is that much more money had been flowing from the Crown to the RBNZ to cover the estimated $11b cost of its main money-printing programme, the Large-Scale Asset Purchase programme.

The Crown has been paying the RBNZ about $250m to $350m a month for a couple of years now to prevent the RBNZ from going into negative equity.

This is borrowed money the Crown could technically spend on public or social services.

In 2020 and 2021, the RBNZ created about $55b so it could become a very active player in the New Zealand Government Bond (debt) market to help drive down interest rates and stimulate the economy.

The programme also helped soothe dysfunction in the bond market at a time there were concerns about the amount of debt the Government was issuing to pay for the likes of the wage subsidy.

The Government and RBNZ knew creating money for the central bank to buy bonds came with risk.

So the Government provided the RBNZ with an indemnity. It said it would cover the cost of any losses suffered because of the programme.

As it turned out, the losses were large.

Inflation spiked much more than expected globally. This prompted central banks to lift interest rates, which devalued the wad of bonds the RBNZ bought (and is now selling back to the Crown).

The Government is recapitalising the RBNZ as these losses are being realised.

The RBNZ argues the benefits of its money printing programme outweigh the costs. For example, lower interest rates boosted asset values, spurred economic growth, supported employment and gave the Government more tax revenue.

Of course, it all ended up being too much. We got high inflation, high interest rates to cool things down, and now a triple-dip recession.

Neither the RBNZ nor Treasury have attempted to put numbers on the direct and indirect costs and benefits of the money-printing programme.

Nonetheless, the $600m dividend the RBNZ is paying the Crown with one hand should be viewed alongside the roughly $300m a month it’s receiving from the Crown with the other.

It’s also worth noting the Crown has provided the RBNZ with a new indemnity, should it need to do another bond-buying programme in the future.

And, it has given the RBNZ an indemnity to cover losses suffered by it beefing up its capability to intervene in the currency market in a crisis.

Taking a step back, giving the RBNZ more firepower by expanding the size of its balance sheet could protect New Zealand in a future crisis.

But, it also exposes taxpayers to more risk, as we’re on the line for covering the cost of losses associated with this intervention.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.