In mid-2019, the Reserve Bank signalled it was considering unconventional monetary policy such as quantitative easing (QE), vulgo: money printing.
Back then, Eric Crampton, Robert MacCulloch and I wrote a short paper called The Unreserved Bank of New Zealand: Why unorthodox monetary policy needs boundaries.
We urged that quantitative easing should only be used to reach the Bank’s monetary goals. Deploying its newly created money for other purposes risked politicising the Reserve Bank.
It seems stronger warnings were needed.
RBNZ Chief Economist Yuong Ha this week delivered a speech prepared by Vanessa Rayner, the Bank’s Head of Financial Markets. The topic was “A Strategic View of Te Pūtea Matua’s [the RBNZ’s] Balance Sheet”.
Sounds technical, but what a bombshell it contained: “When looking at the future of our balance sheet, it should come as no surprise that climate change and sustainable finance is at the forefront of our minds.”
The Reserve Bank’s balance sheet Rayner refers to has swollen to $85 billion. Of that, $57 billion are bonds it purchased under the QE programme with new central bank money.
By June 2022, when the QE programme is likely to run out, these sums would have increased by another $43 billion.
So, what will happen with this large position on the Reserve Bank’s asset side?
It is indeed no surprise that the RBNZ is focussing on climate change. It does so in its regulatory role in financial markets.
However, what is new is that Rayner suggests the balance sheet itself may promote climate change policies. “There is also opportunity for central banks to take a step further to ensure their balance sheet operations actively support the transition to a low carbon economy,” she said.
The RBNZ has no formal mandate for climate policy. So far, it had always maintained that the purpose of QE was monetary policy.
Rayner’s speech confirms our biggest worries from two years ago. We were concerned that the vast sums under the control of the RBNZ would be too tempting to use to achieve other goals.
Should it come to that, it would mark another milestone in the ongoing politicisation of our central bank. From a Reserve Bank once celebrated for its focus on price stability and for its independence, it would have turned itself into a political institution.
Because of this, we can only repeat our 2019 recommendation: The Minister of Finance and the Reserve Bank Governor should urgently reaffirm what the role of the RBNZ ought to be.