Orr could print more money
Reserve Bank Governor Adrian Orr is open to creating money to finance emergency Government borrowing if that’s 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, become 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’’, 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 paredback 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 that the current system was operating well, keeping interest rates where the Bank would like them.