Paul Tucker - How quantitative easing has impacted the public finances

<p>The cost of the Reserve Bank's buy-up of government bonds during its 2020-2021 quantitative easing (QE) programme has come into focus as interest rates have risen.</p><p>Notably the balances of exchange settlement accounts held by banks and others with the Reserve Bank soared as the central bank bought government and local government bonds off banks in the secondary market, peaking at $56.4 billion last December after averaging about $7.5 billion in the decade up to 2020.</p><p>Holders of the settlement accounts receive interest on their deposits at the Official Cash Rate (OCR), which has risen to 5.25% since the 0.25% Covid low.</p><p>Treasury says<a href="https://www.interest.co.nz/public-policy/120770/could-or-should-rbnz-cut-interest-rate-it-pays-banks-settlement-cash-accounts" target="_blank"><strong> its best estimate</strong></a> of the expected direct fiscal loss from the Reserve Bank's QE, its so-called Large Scale Asset Purchase (<a href="https://www.rbnz.govt.nz/monetary-policy/monetary-policy-tools/large-scale-asset-purchase-programme" target="_blank"><strong>LSAP</strong></a>) programme, is about $10.5 billion. It notes this has been partially offset by the fiscal benefits of the LSAP through stabilising the NZ government bond market and providing economic stimulus at a time of heightened uncertainty in 2020.</p><p>From a whole-of-government perspective Treasury says the LSAP withdrew fixed-rate government bonds from the market and replaced them with floating-rate settlement cash balances. This means the Crown has more floating rate liabilities, becoming more exposed than it would have been to rising interest costs.</p><p>In the latest episode of interest.co.nz's <a href="https://www.interest.co.nz/of-interest-podcasts" target="_blank"><i><strong>Of Interest podcast</strong></i></a> Paul Tucker, former deputy governor of the Bank of England and now a research fellow at the Harvard Kennedy School, speaks about the impact of QE on the public finances. Tucker's also the author of a recent paper calle