These balances are expected to fall as the programmes are unwound. But in the meantime, the RBNZ is paying increasing rates of interest (the OCR is 4.75 per cent and expected to rise further) on a large sum of money.
This is costing the Crown billions of dollars, which could be invested elsewhere.
Some other countries are in similar positions.
Former Bank of England deputy governor Paul Tucker in October wrote a paper exploring whether central banks could pay banks a lower interest rate on a portion of their settlement balances to effectively save taxpayers money. This prompted the Herald to explore the idea.
RBNZ deputy governor Christian Hawkesby, in November, told the Herald he opposed the concept, fearing it could hamper the transmission of monetary policy.
He worried paying banks less interest while trying to get them to lift their mortgage and deposit rates could complicate things.
He said the RBNZ’s priority was to lower inflation in line with its mandate, and if the aim of paying banks less interest was to effectively tax them more to help pay for the Covid response, then that was a matter for the Government to consider.
When the Herald asked Robertson about the issue around the same time, he said he hadn’t received advice on it.
Nonetheless, documents released under the OIA show the Treasury subsequently briefed him on the topic.
It estimated that paying banks no interest on half their settlement balances could save the Crown $3.3b by 2027.
But it said that if the Government wanted to tax banks more, it should consider doing so using a different approach.
Changing the rate of interest paid on banks’ settlement balances would produce a volatile revenue stream that would vary depending on the OCR and the size of banks’ balances.
The Treasury also noted the impact the change could have on the implementation of monetary policy and said it could affect perceptions around the RBNZ’s independence.
It suggested Robertson seek advice from the RBNZ if he wanted to further explore the matter. So, he took the issue to the RBNZ, which reported back to him in February.
As per Hawkesby’s comments, the central bank was strident in its opposition to the idea.
It feared paying banks less interest on part of their settlement accounts could prompt them to lower interest rates at a time the RBNZ wants them to keep rates elevated to dampen inflation.
It noted paying banks interest at the OCR “creates a floor under short-term market interest rates”.
The RBNZ also worried paying banks less interest could deter them from running high settlement balances. This could reduce the efficacy of the tools at the RBNZ’s disposal to influence interest rates, as these can influence the amount of settlement cash banks hold.
The RBNZ recognised that both it and other central banks have in the past paid banks different rates on parts of their settlement balances.
But because, in the current environment, this wouldn’t help the RBNZ meet its inflation target or make the financial system more stable, changing the system would be counterproductive and make it look like the RBNZ was too cosy with the Government.
“It would be unprecedented internationally for an advanced economy central bank to introduce tiers for reasons unrelated to their own objectives,” the RBNZ said.
“This policy would amount to a tax on a specific section of the financial sector, which RBNZ lacks public legitimacy to make decisions around and would be in tension with RBNZ’s other objectives.”
A spokesperson for Robertson said, “The minister has not requested further advice on introducing a tiering system at this time”.
