The Government and the Reserve Bank are letting banks off scot-free. The full cost of printing money for the Large Scale Asset Purchase Programme and the Funding for Lending Programme is now falling on taxpayers while banks make record profits.
Support during Covid was provided to financial institutions in an attempt to keep interest rates low. The banks ploughed most of the money into the property market which pushed housing prices to record levels, increased the banks’ bloated profits and contributed to the rise in inflation.
Now the Reserve Bank intends to pay the banks interest on the cheap money it provided to them to the tune of $1.7 billion a year. This is madness.
How did this happen? Historically the Reserve Bank paid the banks interest at the official cash rate (OCR) on the reserves they held. Typically, banks held about $7 billion in reserves with the Reserve Bank, but with the two money printing schemes, the reserves now stand at $49 billion.
A former Bank of England deputy governor, Paul Tucker, has suggested central banks could pay interest on just part of their reserves.
Our Reserve Bank is aware of the idea but is not “actively considering it” as it may “complicate things”. The Reserve Bank considers that paying the private banks less interest could hamper its efforts to lift interest rates to cool inflation.
We say this is lazy thinking. The Reserve Bank should put itself out a little to save taxpayers $1.7 billion a year – and rising. This is almost the entire annual budget for police.
The Government is also ducking for cover, with our Finance Minister refusing to get involved. This is despite his providing the bank with an indemnity to cover any losses caused by these programmes.
Both programmes have been a disaster for the country. Now paying banks $1.7 billion in interest for the privilege of receiving cheap money is rubbing taxpayers’ noses in it.