Treasury puts $5 billion price tag on Reserve Bank’s QE program

The Treasury expects the Reserve Bank’s (RBNZ) quantitative easing program, or Large Scale Asset Purchase Program (LSAP), to cost $5.1 billion directly.

When the program, designed to lower interest rates and ease bond market dysfunctions, was launched in early 2020, the Treasury expected it to be cost-neutral over time.

But now that interest rates are rising faster than expected, he estimates the net direct tax cost will be $5.1 billion.

The Treasury disclosed this figure in its Investment report 2022noting that the cost of the program will only be known once it is fully unwound by 2027.


The LSAP program saw the RBNZ create money to buy $53.5 billion of New Zealand government bonds (debt) in the secondary market between March 2020 and July 2021.

The idea was that with the RBNZ becoming a very active bond buyer, the price of government bonds would rise. This would reduce government bond yields, which would translate into lower interest rates across the rest of the economy.

The RBNZ wanted to cut interest rates to stimulate the economy and keep inflation and employment buoyant. He launched the LSAP program because he didn’t have too much leeway to further reduce the official exchange rate (OCR), which was already close to zero.

This suited the Treasury, as it kept interest charges low on the debt it issued to cover Covid-related expenses.


As interest rates followed a decline in 2020 and early 2021, government bonds issued earlier in the period had a higher yield. This made them more valuable.

So when the RBNZ started buying the bonds on the secondary market (ie from the banks that bought them from the Treasury), it paid a premium. the eligible banks included ANZ, BNZ, Citibank, Commonwealth Bank of Australia, parent ASB, Deutsche Bank, HSBC, JP Morgan, Morgan Stanley, Rabobank, Toronto Dominion Bank, UBS and Westpac.

The Treasury said the RBNZ paid $7.2 billion more for the bonds than they were originally issued for. This was recorded as a loss on the government’s balance sheet and resulted in an increase in net debt.

Initially, the Treasury was not overly concerned about this, arguing that the loss would be made up by the LSAP program reducing interest charges on government borrowing.

Less than a year later, interest rates are rising more than expected as the economy overheats and Russia’s invasion of Ukraine exacerbates inflationary pressures.

The benefits of the LSAP program do not persist long enough to outweigh the initial cost. Or, in the words of the Treasury, “the loss on the state balance sheet and the reduction in debt servicing costs should no longer offset each other.

“Based on current interest rate expectations, the net direct fiscal cost of the LSAP program is currently expected to be $5.1 billion…

“This is calculated as the fair value of the government indemnity to the RBNZ, valued at $5.5 billion in January 2022, less accrued interest savings to date of $0.4 billion.”

Importantly, the Treasury noted that we will not know the ultimate loss or gain from the LSAP program until it is unwound in 2027, when the RBNZ is expected to have sold the last of its government bonds. New Zealand Treasury. The RBNZ is expected to start selling the bonds in July.

Modification of the interest rate risk profile

The Treasury made another point. He noted that the LSAP program has made the government’s balance sheet more sensitive to changes in the OCR (which is expected to increase steadily).

In effect, the RBNZ pays interest to the banks (at the OCR) on the money they received from the RBNZ when they sold their government bonds to it in 2020 and 2021.

As of March 18, the RBNZ was paying interest on $49.1 billion in deposits that banks had in their settlement accounts with the RBNZ. As of February 2020, the balances in these accounts were just $7.4 billion.

Was the LSAP worth it?

Lower interest rates have undoubtedly inflated asset prices and supported demand, employment and government tax revenues.

However, it is difficult to disentangle the impact of the LSAP program from the impact of the other tools used by the RBNZ to lower interest rates – OCR and the Loan Funding Program.

The Treasury noted that in August 2020, the RBNZ estimated that New Zealand government bond yields were at least 50 (and potentially more than 100) basis points lower thanks to the LSAP program.

The Treasury also said the LSAP program should “increase tax revenue by supporting broader economic output.”

Former RBNZ director turned blogger Michael Reddell saw the Treasury’s lack of analysis on the benefits of the LSAP program as a criticism of the RBNZ.

By lowering longer-term interest rates, he said the LSAP program was designed to benefit the government more than households and businesses, which tend to borrow money at shorter-term rates. derived from OCR.

Nevertheless, the Treasury expects the government to suffer a loss of $5.1 billion on the program.

“The bank took a punt, and the punt didn’t pay,” Reddell said.

Indeed, the Treasury said: “In establishing the LSAP program, it was understood that uncertainty about the future path of OCR meant that the program could result in a material gain or loss.”

Reddell acknowledged that in March 2020 no one expected the economy to rebound so quickly. However, he thought the RBNZ could have stopped buying bonds sooner than it did, once a recovery was visible.

Post-match examination required

Reddell also criticized the RBNZ for not releasing a proper risk assessment of the LSAP program, detailing what would happen if interest rates rose.

Infometrics Senior Economist Brad Olsen also noted the lack of control over the LSAP program when it was hastily launched as bond markets soured and the economic outlook dire.

He said a post-match review was particularly important as the RBNZ left the door open to using bond buying again in the future.

One of the reasons given by the RBNZ for deciding to actively sell the bonds it has purchased, rather than letting them file for bankruptcy as they mature, is that it would empty the bridges and potentially facilitate the buying bonds again. in the future.

Nevertheless, the Bank itself expressed some hesitation about using the tool to set monetary policy.

He said the better understood OCR would be the main tool he would use to tighten monetary conditions going forward. He didn’t expect the gradual sale of his bond holdings to have too much of an effect on interest rates, though the jury is still out on that.

Labor MPs on Parliament’s Finance and Expenditure Committee have blocked numerous demands by Green MP Chlöe Swarbrick for a review to be made of the government’s and RBNZ’s economic response to Covid-19.

Swarbrick’s concerns largely relate to the distributional impacts of low interest rates – that is, how they have benefited asset owners.

Meanwhile, National MP Andrew Bayly has raised concerns in committee meetings about losses related to the LSAP scheme.

Richard L. Militello