Act party leader David Seymour says he would not have guaranteed the Reserve Bank of New Zealand's (RBNZ) money printing programme if he was in Finance Minister Grant Robertson's shoes.
Robertson in March 2020 agreed to indemnify any losses the RBNZ suffered due to its Large-Scale Asset Purchase (LSAP) programme.
The programme saw the RBNZ create money to buy $54 billion of mostly New Zealand Government Bonds (government debt) to lower interest rates to stimulate the economy, and to support the bond market.
The RBNZ and Treasury always knew changes in interest rates would affect the value of the bonds the RBNZ bought.
Indeed, when the RBNZ started lifting interest rates to curb inflation, the value of its bond portfolio fell.
All the bonds the RBNZ bought are now worth $8.8b less than what it bought them for. If interest rates rise even more, the loss will be larger, and vice-versa.
The losses are being realised, as the RBNZ has this month started a five-year process of selling the bonds it bought. It wants to normalise the size of its balance sheet to make it easier for it to potentially use bond-buying again in a future downturn.
Seymour believes the RBNZ would have taken a more risk-averse approach towards money printing if Robertson didn't provide it with a Crown backstop.
He went so far as to assume the RBNZ wouldn't have gone down this pathway at all to avoid the risk of the programme making it insolvent.
Australian Government will likely need to bail out the RBA
Nonetheless, the Reserve Bank of Australia (RBA) is among the central banks that printed money without a Crown guarantee.
While no decision has been reached on how its losses will be handled, Triple T Consulting managing director Sean Keane believes the Australian Government will almost certainly end up recapitalising the RBA.
He told the Herald he expected the RBA to unveil the estimated loss it faces when it publishes its annual report in September.
Given the risks associated with the LSAP programme (which is akin to "unconventional monetary policy" used by other central banks), Keane said it was important for the RBNZ to have buy-in from the Crown.
He believed the Australian Government may have struggled to put an indemnity in place as quickly as was required in early-2020 due to the political environment there at the time.
Responding to Seymour's argument, Keane agreed the RBNZ may not have gone ahead with the LSAP programme if it didn't get Robertson's support in the form of a Crown indemnity.
Full impact of LSAP programme unknown
He noted it is difficult to assess what state the economy might have been in had Robertson refused the RBNZ's indemnity request.
Even with the benefit of hindsight, it was hard to prove how much worse off the New Zealand economy would have been without the LSAP programme, or to reach any definitive conclusion about whether the estimated $8.8b cost was worthwhile.
The Treasury, in a mid-April report, said the programme "played a significant role in reducing the Crown's finance costs by lowering interest rates and supporting overall economic activity during the Covid-19 pandemic". This economic activity also increased the Government's tax take.
But the Treasury conceded, "In the absence of a reliable estimate of the impact of the LSAP programme on economic activity however, the total impact of the LSAP programme will remain unclear."
Indeed, Robertson couldn't tell Seymour whether he backed an estimate the RBNZ made in August 2020 that the LSAP programme shaved 50 to 100 basis points off New Zealand Government Bond yields.
Responding to questions from Seymour on the cost of money printing, Robertson said, "The indemnity was recommended by Treasury because the policy was seen to be in the public interest and to ensure that the policy could be implemented.
"Interest rates have shifted since that time and, as with our fiscal response, there are costs associated with the measures that the RBNZ took," Robertson said.
"However, the economic and social costs of not providing that support at the time is something that the member might want to reflect on."
Robertson went on to tell Seymour, "The member may have 2020 hindsight or be Nostradamus and be able to predict what interest rates might have been two years from March 2020. We weren't in that position. I back the decisions we took."
Seymour's opposition to the LSAP programme aligns with his party's view that the Government should've spent less supporting businesses and households in the wake of Covid-19.
Speaking to the Herald, he argued that lower interest rates, enabled by the LSAP programme, made it easier for Robertson to justify borrowing and spending a lot.
Seymour said the LSAP programme had "political consequences".
"Because people said, 'The economy's going great by the end of 2020'. Well actually, it wasn't. We just transported the problem to the future," Seymour said.
Robertson has continued to say now isn't the time for a big public post-mortem of the economic response to Covid-19.
National's finance spokeswoman Nicola Willis is calling for such a review.
Labour Party members of the Finance and Expenditure Committee are also continuing to block requests from Willis and the Green Party's Chlöe Swarbrick for it to undertake such an inquiry.