Governor Orr could print more money
Reserve Bank governor Adrian Orr is open to creating money to finance emergency government borrowing if that is what is required to survive the Covid-19 shock.
He also signalled that he wouldn’t use the economic crisis as an excuse to back down on tough and costly regulatory changes for banks.
In an interview with Stuff, Orr said he was open to the idea of money financing, that is, the Reserve Bank creating money to lend to the Government for its spending.
‘‘You could shift, at an extreme, to something called money financing, where the Government says ‘I want to spend 100, credit our account with 100’ and that’s just us creating money,’’ he said.
But the current legislation governing the bank would prohibit Orr from moving in this direction. Finance Minister Grant Robertson would have to draft and pass legislation before the bank could move to money financing.
‘‘Currently, I wouldn’t be able to do it – it would be outside our legislation,’’ Orr said.
He said if money financing was something the Government wanted to do, it would have to have ‘‘a very transparent policy’’ about doing so, with an eye to unintended consequences.
Orr speculated that monetary finance would make sense if the bond market, which is how governments sell their debt, became dysfunctional.
‘‘Let’s pretend the Government’s bond market fell apart, you know global shocks [and] no one wants a bar of anything whether it is New Zealand [government debt] or not and at that point you might have to think about different tools.’’
One of those tools would be money financing. But he said this would come with risks, including a return to the toxically high inflation New Zealand last saw in the 1970s and 1980s.
‘‘The risk it brings is loss of independence over monetary policy and the fear that while it was done as a one-off, it becomes the norm. Then we’re back to high inflation uncertainty and all of the costs that central bank independence has helped remove,’’ Orr said.
It doesn’t look like Orr will be pushing for these changes any time soon.
‘‘I think it’s important to consider those things. That’s not to say we would be rushing to do it, not at all,’’ Orr said.
Since March, the Reserve Bank has been operating a pared-back version of this sort of money creation. The bank creates money to buy government debt from private buyers who have bought it from the Government. So far, it has set itself a $60 billion limit for the scheme.
The Reserve Bank is not currently buying debt directly from the Government
or at the direct request of the Government, a crucial distinction.
Orr said the current system was operating well, keeping interest rates where the bank would like them.
At the moment, the bank’s policy is designed to make sure its interest rate decisions flow through to the market. It was not directly meant to help the Government keep down its borrowing costs, which is a side effect.
Moving to money financing would be very different as it would mean the bank creating money for the direct purpose of allowing the Government to borrow more.
Orr also touched on the big changes coming for how much capital the big Australian banks are required to hold.
Last year, the Reserve Bank finalised a plan to ask the banks to hold more capital, making them much safer in the event of a crisis, but less profitable when times were good.
The banks were slated to start the $20b process of implementing those changes but Orr put the reforms on ice for a year to allow banks to focus on lending to customers hit by Covid-19.
The changes were meant to help the banks survive a 1-in-200-year shock, much like the one they are currently weathering. Orr thinks that instead of showing the banks were stable enough as they were, the Covid-19 shock shows he was right to ask them to become even safer.
‘‘Banks haven’t even begun to be tested,’’ he said.
But he said the fact that banks had been holding more capital in readiness for the implementation of the rules shows that he was right to make the change – the extra capital had helped them weather the current crisis.
Orr said he plans to roll out the changes as planned next year.