Have the Treasury, RBNZ & Finance Minister made a $2 billion per annum financial blunder?
Are Kiwis paying a $1 billion per annum interest bill - which is set to rise to $2 billion per annum - to the Big Aussie Banks on top of their mortgages due to a government blunder? Could this story explode? It's a good one, so read on.
It appears that the NZ Treasury, RBNZ & Finance Minister may have drawn the nation into a financial difficulty, one which I never knew about until revelations yesterday in the BBC & Financial Times in the UK (below). It's a little technical - but here is an outline of what has happened:
"Under the QE program, the BoE created £895 billion of money & used most of the cash to buy government bonds from pension funds & other investors in the financial markets. When those investors put the proceeds in commercial bank deposits at the BoE, the central bank had to pay interest at its official interest rate .. The government’s failure to [insure the cost of this debt], despite Sunak (UK Chancellor) regularly warning about the risks of higher inflation & interest rates on the costs of servicing government debt, has now cost taxpayers £11 billion".
Let's look at the implications for NZ. Up until February 2020, the level of "settlement cash" balances held by our commercial banks at the RBNZ totaled $7 billion. Those banks (like Westpac) receive the Official Cash Rate on these balances. I used to work in Liquidity Management at the RBNZ and my job was to measure these balances every day.
But take a look at the attached spreadsheet - as the Reserve Bank engaged in its "Large Scale Asset Purchasing" Program (often referred to as Quantitative Easing or "QE") those settlement balances ballooned. As of today, they stand at $ 46 billion. (See column B for settlement cash & column S for cash injections coming from QE in the Excel file).
Now here's the rub: in March 2020 when settlement balances were $7 billion, the OCR was 0.25 percent. Now it is 2% - which is the interest rate currently being paid on the $46 billion of commercial bank deposits at the RBNZ. That will amount to nearly $1 billion in interest over the next year. Since the OCR is forecast to rise to 4% (by the RBNZ itself) then this bill is set to increase to $2 billion a year.
These numbers are staggering - a huge wealth transfer from Kiwi tax-payers to the (mostly) Australian-owned banks. The losses are happening right now - they have become "realized losses".
Maybe the Finance Minister & RBNZ Governor can explain to the media why NZ did QE in the first place when the Minister said in 2020-21 we were in a far "stronger economic position" than others (due to virus elimination). Having mistakenly copied overseas QE policies which were unnecessary in NZ, maybe they could then apologize for the outrageous interest bill that is set to hit $2 billion per annum - incurred directly as a result of that policy.