Banks unlikely to fund money printing

Fears move would hinder taming inflation The RBNZ has operational independence.

Neither the Government nor the Reserve Bank (RBNZ) want to make banks do more to help cover the cost of printing money. The RBNZ’S two money-printing programmes, launched in 2020 to lower interest rates, have seen banks’ reserves held by the RBNZ balloon seven-fold to $49 billion.

The issue for taxpayers is the RBNZ pays banks interest at the official cash rate (OCR) on these reserves, and the OCR is rising rapidly.

At 3.5 per cent — the current OCR, $49b of reserves would see the RBNZ pay banks $1.7b a year.

If the OCR peaked at 5.5 per cent, as forecast by the RBNZ, this payment would rise to $2.7b on $49b of reserves.

The RBNZ has never faced these costs in the past. Before Covid-19 prompted it to start printing money, it typically held $7b or $8b of bank reserves, or settlement cash.

A former Bank of England deputy governor, Paul Tucker, last month published a paper suggesting central banks could consider paying banks less interest on part of their reserves, provided the risks were managed properly.

This would save taxpayers money — possibly hundreds of millions of dollars a year in New Zealand’s case.

Put to Finance Minister Grant Robertson, he said he hadn’t received advice on the issue, which was a matter for the RBNZ.

“The RBNZ has operational independence and its policy is to pay banks the OCR on their settlement balances,” Robertson said.

“This approach is in line with other central banks.”

When put to RBNZ deputy governor Christian Hawkesby, he said paying banks less interest on part of their reserves could hamper the RBNZ’S efforts to lift interest rates to cool inflation.

Hawkesby was aware of Tucker’s work but said the RBNZ wasn’t “actively” considering a policy change.

He worried paying banks less interest while trying to get them to lift their mortgage and deposit rates could complicate things.

The RBNZ’S priority was to lower inflation, and “the way we’re doing things at the moment gives us the best chance of doing that”.

Hawkesby said if the aim of paying banks less interest on some reserves was to effectively tax them more, that was for the Government to consider.

Nonetheless, Robertson didn’t want to get involved.

He didn’t buy the argument that the rising interest costs the RBNZ faced had become his problem, because the RBNZ couldn’t cover those on its own.

Indeed, the RBNZ has started drawing down on a Crown indemnity, provided by Robertson, to cover losses incurred by its main money-printing programme — its Large-scale Asset Purchase scheme.

Hawkesby isn’t alone in worrying that making banks wear some of the costs of money printing could hinder the RBNZ’S efforts to cool inflation.

His concern is shared by former RBNZ deputy governor Grant Spencer, now an adjunct professor at Victoria University, and former RBNZ assistant governor John Mcdermott, who heads up Motu Research.

Mcdermott last month said it would be too risky for the RBNZ to try to reduce the cost of the problem, which he believed it created, by doing something “cute” with the interest paid on reserves.

However, Michael Reddell — a former senior staffer at the RBNZ — said provided the RBNZ paid banks the OCR on a large enough portion of their reserves, making the change wouldn’t hinder its efforts to get banks to lift interest rates.

Indeed, banks needed some reserves to keep the financial system liquid, so that transactions between banks could be settled.

Furthermore, Reddell noted tiering interest rates paid on bank reserves had been done before by the European Central Bank and Bank of Japan.

While he believed this would be workable, he opposed singling out banks and effectively taxing them more. He didn’t think they were making windfall profits.

But if the Government believed banks should pay more tax, Reddell suggested it lift the corporate tax rate.

Banks’ profits have been rising to record levels in dollar terms.

Their net interest margins have also been climbing this year to levels above those pre-covid. Net interest margin is an indicator of how effectively a bank uses its funding to generate revenue.

Finance Minister Grant Robertson