RBNZ subsidises banks with $12.7b of cheap loans

TLDR: The headlines later today will all be about the Reserve Bank’s well-telegraphed 50 basis point hike in its Official Cash Rate to 2.5% and how it’s another measure to slow the economy and inflation down.

So why is the Reserve Bank still lending banks $12.7b of subsidised cash that is helping to keep asset prices inflated, keep term deposit rates low and further increase bank profits, which are already running at $20m per day?

The Reserve Bank set up its Funding for Lending programme during the first year of the Covid crisis to lend banks billions at the same rate as the Official Cash Rate in order to encourage lending and help boost home-owner wealth so as to support the economy. That worked, pushing up house prices 45%, but by mid-2021 it was clear it had worked too well and was generating too much inflation. So the central bank stopped money printing in mid-2021 and started hiking the OCR in October last year because it wanted to slow inflation.

So why is it still shovelling out discounted loans to banks at a rate that means more than a quarter of all new bank lending since December 2020 has been backed by these subsidised loans – and nearly 40% of all new lending since it started tightening monetary policy?

The Reserve Bank’s still-open Funding for Lending Programme of cheap loans for banks is not only still going strong, it has doubled in size since the RBNZ began outwardly tightening monetary policy from October last year. Photo: Lynn Grieveson / The Kākā

Paid subscribers can see more detail and analysis of the ongoing Funding for Lending Programme below the paywall fold and in the podcast above. Paid subscribers who want this released publicly immediately can vote below the fold.

Elsewhere in the news overseas and here this morning: