Introduction to the Reserve Bank’s Money-Printing Policy
The Reserve Bank’s $53 billion money-printing policy, also known as Large Scale Asset Purchases (LSAP), was implemented during the pandemic to support the economy. According to the central bank’s chief economist, Paul Conway, this policy paid for itself and helped keep the economy functioning during a time of stress.
The Cost and Benefits of LSAP
The LSAP program cost the economy about $10.5 billion in losses, but it also had significant positive benefits. By boosting economic activity during the pandemic, LSAPs increased government tax revenues, which almost entirely covered the direct losses from LSAPs. This left consolidated crown debt virtually unchanged over the medium term. Additionally, the program restored financial market confidence, lowered long-term interest rates, and supported exports by holding down the exchange rate.
Alternative Approaches
Conway suggested that using negative interest rates would have been preferable, but this option was not available when the pandemic hit. Negative interest rates allow a central bank to charge commercial banks to hold their excess reserves, instead of paying them interest, as a way to stimulate economic activity. If moderately negative interest rates had been possible during the pandemic, they could have delivered similar outcomes for growth and inflation as LSAPs, but at a lower cost to the crown.
Challenges and Criticisms
The LSAP program was criticized by several commentators due to its cost and the related program of $19 billion of cheap loans to banks. The then-government’s big-spending policies, such as the wage subsidy and other pandemic support policies, also worked against the RBNZ’s approach and contributed to the inflation spike. Conway noted that containing inflation over this period required the Official Cash Rate (OCR) to be higher than otherwise, and that fiscal support during the pandemic should have been more timely and temporary.
Monetary Policy Meetings
The RBNZ holds seven meetings a year, and there was a suggestion to add an extra monetary policy meeting to the calendar. However, Conway stated that there was no evidence that the 12-week gap between decisions over summer had led to unusual divergence between financial market expectations for policy rates and the RBNZ’s own. While the RBNZ acknowledges the perception that the gap between November and February is too long, they have sought ways to reduce it within the confines of data availability.
Conclusion
In conclusion, the Reserve Bank’s money-printing policy during the pandemic had both positive and negative effects on the economy. While it cost the economy $10.5 billion, it also increased government tax revenues, restored financial market confidence, and supported exports. The use of negative interest rates could have been a preferable alternative, but it was not available at the time. The RBNZ’s approach was also challenged by the government’s big-spending policies and the resulting inflation spike. Overall, the LSAP program played a crucial role in supporting the economy during a time of stress, and its effects will continue to be felt in the years to come.
