The central bank push me-pull you | interest.co.nz

The Reserve Bank’s well-heralded 50 basis point hike in its official exchange rate to 2.5% this week was clearly promoted as another “resolute” move to remove inflationary heat from the economy.

So why does the central bank continue to lend retail banks $12.7 trillion in subsidized liquidity, helping to keep asset prices inflated, term deposit rates low and rising further? the profits of the banks, which already amount to 20 million dollars a day?

The Reserve Bank set up its Loan Funding Scheme in the first year of the Covid crisis to lend banks billions at the same rate as the official cash rate to encourage lending and help to increase the wealth of the owners in order to support the economy. It worked, driving house prices up 45%, but by mid-2021 it was clear it had worked too well and was generating too much inflation. So the central bank stopped printing money in mid-2021 and started increasing the OCR in October last year because it wanted to slow inflation.

So why does it continue to provide discounted loans to banks at a pace that means more than a quarter of all new bank loans since December 2020 have been backed by these subsidized loans – and almost 40% of all new loans since the start of monetary policy tightening? ?

It seemed like a good idea at the time and might well have encouraged lending and supported a fragile economy in the first half of 2021, but the Reserve Bank’s still-open Loan Funding Program (FLP) of cheap loans for banks is not only still getting stronger, it has doubled in size since the RBNZ began to tighten monetary policy from October last year.

Reserve Bank data shows it has lent $12.6 billion to unspecified banks under the program since its launch in December 2020, including $6.6 billion since it began lending. officially tighten its policy at the end of October last year. Another $350 million was loaned out last week.

This means that 26% of all new housing and business loans since December 2020 have been backed by the central bank through these loans, and 36% have been backed since the Reserve Bank began to increase the OCR in October last year.

Banks have slowed their loan growth since the end of 2021, in part because the Reserve Bank tightened restrictions on low-deposit loans, but cheap loans are also having the effect of boosting already healthy profit margins. banks. This is because they generally have to pay retail savers in Aotearoa-NZ and a few overseas wholesale lenders higher rates for term deposits and wholesale bonds.

Banks made $1.75 billion in profits in the March 2022 quarter alone, or nearly $20 million a day, compared to $1.36 billion in the December 2020 quarter, when FLP reported. been launched. This is partly explained by higher net interest margins since December 2020, as these tables and graphs from KPMG’s quarterly banking report show.

Profit margins at the big four banks have increased by about 20 basis points since the start of the FLP, which equates to at least $25 million a year of the $12.6 billion currently loaned to OCR. Overall earnings from net interest margins on loans over deposits increased by $145 million in the six months that FLP began operating at full capacity.

So what? – Why is a taxpayer owned body subsidizing already profitable banks (mostly private and mostly Australian) to the tune of tens of millions of dollars and in a way that makes it easier for them to lend cheaply to inflate value houses ? And while ostensibly trying to slow down the activity of the economy and reduce inflation?

The Reserve Bank said it promised banks when the FLP was set up that it would run for two years from December 2020, but within six months it was withdrawing its stimulus through its LSAP. (Large Scale Asset Programme) or quantitative easing program of printing money to buy bonds, and in 10 months was actually increasing OCR.

The Reserve Bank said it didn’t want to go back on its word to keep the program open for two years, but that doesn’t explain why it accepted the applications that kept coming in, particularly the last year when it should have tightened its policy.

In my view, the Reserve Bank should have shut down the FLP at the same time it stopped buying more government bonds in mid-2021, when only $3.6 billion had been loaned out. Another $9 billion has been lent since then, supporting just over a third of new bank lending and adding tens of millions to banks’ profits.

About Meredith Campagna

Check Also

Bahamian Securities Regulator Freezes FTX Assets

The Bahamas Securities Commission (BSC) froze the assets of FTX Digital Markets (FDM) and “related …