Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.
With the RBNZ about to embark on their five-yearly review, which follows a report titled How Central Bank Mistakes after 2019 Led to Inflation, we thought we’d add our small voice to the conversation.
If you recall, the RBNZ went in to bat (with a very big bat) during Covid to ensure the economy didn’t tip over and the credit/banking system remained functional.
It did this with three broad tools:
- Aggressively cut the “OCR” to stimulate borrowing (this is “Reserve Bank 101” for stimulating an economy during shock or recession).
- Devised and then embarked on the “LSAP” (Large Scale Asset Purchase Programme) – this is a sophisticated way of saying “printing money” as the RBNZ purchased government bonds in the secondary market to stimulate more purchasing demand for newly released (and additional) government bonds – to support new government spending during this time.
- Devised and then embarked on the FLP (Funding for Lending Programme) – where the banks had access to large additional facilities at RBNZ at the cost of the OCR at the time.
All of these had the impact of providing a significant amount of new money into the banking sector.
What wasn't thought about at the time, was how the banks would then use that money.
The graph below shows the rolling 12 month change in Home, Business and Agriculture lending, with source data from RBNZ. It covers the period before, during and after those programmes.