IMF: Reserve Bank’s money printing improved the Government’s books - a little

The International Monetary Fund (IMF) says the Reserve Bank’s (RBNZ) main Covid-era money printing programme likely improved the Government’s finances.

The central bank’s Large-Scale Asset Purchase (LSAP) programme is expected to directly cost the Crown nearly $11 billion.

However, the IMF believes the programme stimulated the economy so much, it helped boost the Government’s books by more than this amount.

It said, in a new report, the overall impact of the programme on the “medium-run level of public debt” is likely to “remain favourable, though small”.

RBNZ governor Adrian Orr shared a rosier view of the programme when the Herald pressed him on it a year ago. He said the benefits were worth “a multiple” of the direct cost.

The IMF’s modelling also suggested that if the Government stimulated the economy to a similar extent to that which the RBNZ did via the LSAP programme, it would’ve ended up more in debt in the medium-term.

By way of context, the wage subsidy was by far the largest Covid-era Government policy. It cost $18b.

Going back to the LSAP programme, it saw the RBNZ create money to buy around $55b of New Zealand Government Bonds (debt to pay for the likes of the wage subsidy) on the secondary market in 2020 and the first half of 2021.

The RBNZ being such an active player in the bond market put downward pressure on interest rates.

This (along with other RBNZ and Government policies) encouraged households in particular to borrow and spend, which increased asset values, supported economic growth and helped keep people employed, lifting the Government’s tax take.

Lower interest rates also made it cheaper for the Government to borrow for the Covid response, and soothed bond markets, which went into panic mode in early 2020.

Nonetheless, the LSAP programme exposed the Government to an enormous amount of interest rate risk.

Because inflation (which the LSAP programme helped create) saw interest rates rise sooner, and by more than expected, the value of the $55b of low-yielding bonds the RBNZ bought plummeted.

The RBNZ currently expects this to see it suffer an $11b loss. This is equivalent to nearly 3 per cent of Gross Domestic Product (GDP). Taxpayers are footing the bill, as the Government backstopped the LSAP programme.

Speaking at a conference in March, Orr equated commentary on the cost of the LSAP programme to “noise”, explaining the primary job of a central bank is to keep inflation in check, not keep its books in the black.

Nonetheless, the IMF believed overall, the LSAP programme still had a positive impact on the Government’s finances. It reached this conclusion factoring in the impact higher-than-expected inflation and interest rates are having on the Government’s books.

“Overall, LSAP by RBNZ had favourable effects on the fiscal stance, even if the earlier-than-expected monetary policy normalisation is taken into account,” the IMF said.

The RBNZ, in a five-yearly review it did of its monetary policymaking, estimated the LSAP programme helped the Government save around $3b in interest costs on the $67b of debt it issued in 2020 and early 2021.

It also noted the part the programme played in supporting the economy, and therefore boosting the Government’s tax take and reducing its expenditure on welfare.

The RBNZ said it was difficult to put a value on the role the LSAP programme played soothing a dysfunctional bond market.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.