The Reserve Bank says its money printing policies when the Covid pandemic hit in 2020 helped save the economy even though they also helped to overheat the economy and fuel inflation.
Reserve Bank of New Zealand. File photo. Photo:
The RBNZ rushed in the Large Scale Asset Programme (LSAP), which bought bonds to lower wholesale interest rates, and later the Funding for Lending Programme (FLP) which lent money to banks at low interest rates for onlending to customers.
In a just released background paper, the RBNZ said the programmes were an effective response to the global economic shock which threatened "very bleak downside scenarios".
"Both programmes were implemented to reduce the risk of a deep recession in which inflation, economic activity and employment could become persistently depressed."
The RBNZ's immediate move to counter the pandemic was a 75 basis point cut in the OCR to 0.25 percent, but added the other programmes to ensure liquidity in the economy, keep a lid on interest rates, and support businesses and employment.
Saved the economy
The central bank claimed the policies worked.
"Lower interest rates also contributed to higher aggregate spending, investment, employment, profits, and tax revenue in the economy. Unemployment, business failures, welfare expenditure and long-term economic scarring were all lower than otherwise."
Under LSAP, the RBNZ bought about $55 billion of government bonds over a 15-month period, before halting it in July last year. FLP set aside $28bn for lending to banks and is set to end in December. The RBNZ is sitting on losses of about $8bn from the bond buying because of changes in their market value since purchase, but has an indemnity from the government for the amount.
The policies have been blamed for fuelling the surge in asset prices notably share markets and in New Zealand the housing market, and thereby causing rampant inflation, which banks are struggling to get under control by aggressively hiking interest rates.
Benefits and costs
The RBNZ paper said the value of LSAP and FLP should be judged on a broad assessment of what they contributed against what they cost.
"The positive impacts of these monetary policy tools - such as supporting economic activity through the pandemic and normalising financial markets - also need to be taken into account alongside the costs of the programme."
However, it conceded its emergency monetary response had helped to over-stimulate economy and cause inflation, which hit a 32-year high of 7.3 percent, and led to the current aggressive rate rises.
"With the benefit of hindsight ... monetary policy was too stimulatory at some stage during the tumultuous economic period of the pandemic.
"Managing future high inflation down, rather than dealing with deflation and economic depression, was considered to be the 'least bad' regret, if one was forced to choose."
A review of the RBNZ's policies during the pandemic was currently under way with a promise it would be reviewed by two overseas central bank experts and fully released.
The paper said the RBNZ was now prepared to use negative interest rates in any future crisis now that local retail banks were technically able to handle them.