Re­serve Bank comes un­der his­toric scru­tiny

Waikato Times - - Opinion - Thomas Coughlan

The Re­serve Bank got some­what lost in the biggest Bud­get week in re­cent mem­ory. It’s fairly un­der­stand­able. If a com­plete me­dia black­out had a price, adding $140 bil­lion to net Crown debt would prob­a­bly be it.

But across the road from the Trea­sury, the Re­serve Bank (Trea­sury’s tra­di­tional ri­vals) had an equally busy week. Gover­nor Adrian Orr pub­lished the bank’s Mon­e­tary Pol­icy State­ment, or MPS, the first since the lock­down. It was sober­ing read­ing.

A month ear­lier, the bank be­gan large-scale as­set pur­chases (LSAP) of up to $33b, mean­ing it es­sen­tially in­vented money to buy the Gov­ern­ment’s debt. The bank, which has an obli­ga­tion to make sure the fi­nan­cial mar­kets run smoothly, calmed the wa­ters by an­nounc­ing it would be­gin to buy bonds from the or­gan­i­sa­tions who held them. Buy­ing such a vast amount of debt im­me­di­ately calmed the mar­kets, and forced bor­row­ing costs down.

It was the be­gin­ning of a round of what is known as al­ter­na­tive mon­e­tary pol­icy – tools the Re­serve Bank uses to con­trol in­fla­tion and boost em­ploy­ment when the OCR stops work­ing. Last week, it dou­bled the LSAP pro­gramme to $60b.

At the be­gin­ning of the month, deputy gover­nor Ge­off Bas­cand also wrote to bank chief ex­ec­u­tives to get ready for a neg­a­tive OCR: banks would be charged for leav­ing their money with the Re­serve Bank overnight. The ef­fect is to en­cour­age banks to lend, pump­ing the econ­omy full of money.

The Re­serve Bank has told re­tail banks they should get ready to im­ple­ment neg­a­tive rates, al­though they promised to hold the OCR of 0.25 for 12 months. The Re­serve Bank is, of course, highly in­de­pen­dent. The fi­nance min­is­ter sets a gen­eral tar­get, and then leaves the bank to it. But in a time of crisis, the im­pli­ca­tions of these de­ci­sions in­evitably land at the feet of politi­cians.

Fi­nance Min­is­ter Grant Robert­son is loath to ven­ture any com­ment on the ac­tions of the Re­serve Bank that could leave him in a dif­fi­cult po­si­tion, as the bank’s de­ci­sions weigh on the Gov­ern­ment. The most ob­vi­ous area of con­cern is what hap­pens when the bank de­cides to slow the LSAP prob­lem. Robert­son has drawn a line in the sand: the Gov­ern­ment will in­dem­nify the bank pur­chas­ing only up to 50 per cent of all Gov­ern­ment debt on is­sue up to $60b. Given it’s ex­pected to lift net debt to $200b (and gross debt to $218b) this means the bank needs to make sure the pri­vate mar­ket gets back to func­tion­ing nor­mally.

While no-one is pre­dict­ing a re­turn to crip­pling bor­row­ing costs seen in the past, even a small rise in bor­row­ing costs could be painful for the Gov­ern­ment bal­ance sheet with such high bor­row­ing.

The Re­serve Bank’s job is to en­sure fi­nan­cial sta­bil­ity, not keep bor­row­ing costs low for the Gov­ern­ment. There are, how­ever, two loom­ing is­sues that do con­cern the fi­nance min­is­ter.

One is the sug­ges­tion from for­mer se­nior Re­serve Bank staffer Michael Red­dell that the Gov­ern­ment should trigger a pro­vi­sion un­der the Re­serve Bank Act to force the bank to pur­sue a dif­fer­ent pol­icy. He’d like to see the New Zealand dol­lar fall to a more com­pet­i­tive ex­change rate, help­ing out ex­porters.

The pol­i­tics of this are dif­fi­cult, and it’s hard to see Robert­son ever in­ter­ven­ing in the Re­serve Bank’s af­fairs, but Red­dell makes the strong point that the ex­change rate is still high by his­toric stan­dards. This makes it dif­fi­cult for our ex­porters to drive the eco­nomic re­cov­ery.

The other point of dif­fi­culty is be­tween the Re­serve Bank and the re­tail banks over strict new reg­u­la­tory stan­dards. Last year, the Re­serve Bank an­nounced it would re­quire the big banks to hold vastly more cap­i­tal, cost­ing them $20b (al­though not all in cash) over seven years.

The banks were less than pleased, not least be­cause the changes would be paid for mainly by re­duc­ing pay­outs to their Aus­tralian par­ents. The Re­serve Bank put the re­forms on ice for a year, al­low­ing the banks to fo­cus their at­ten­tion, and their bal­ance sheets, on help­ing busi­nesses and house­holds through the cur­rent crisis.

There’s no sug­ges­tion that the Re­serve Bank will go back on the re­forms, but it will raise some po­lit­i­cal ques­tions for the banks, who will grum­ble about hav­ing added costs foisted upon them dur­ing a deep crisis.

It’s also a po­ten­tial prob­lem for the Gov­ern­ment, which has so far avoided wad­ing into the is­sue, cit­ing the Re­serve Bank’s in­de­pen­dence. If re­cal­ci­trant banks cut back on lend­ing to pay for the reg­u­la­tory changes, a prob­lem that be­gan with the Re­serve Bank would swi­fltly be­come an is­sue for the Bee­hive.

No-one wants politi­cians talk­ing about cen­tral bank de­ci­sions, but as the eco­nomic crisis deep­ens, politi­cians may not have any choice.

The Re­serve Bank’s job is to en­sure fi­nan­cial sta­bil­ity, not keep bor­row­ing costs low for the Gov­ern­ment.

Adrian Orr, Re­serve Bank Gover­nor

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