RBNZ economist: Quantitative easing ‘better than watching your economy going down the toilet’

Thursday, 16 October 2025

EXPLAINER: In a speech delivered to the Citi Australia & New Zealand Investment Conference in Sydney, yesterday, the RBNZ’s chief economist Paul Conway laid out modelling done so far on the pros and cons of Large Scale Asset Purchasing (LSAPs) - what critics call ‘money printing’ and others call quantitative easing - done during Covid-19 to shore up the New Zealand economy.

He said, effectively, the pros had outweighed the cons.

Conway has been moved to defend the programme before. But now, unlike previously, there is a lingering recession to factor in, and critics who link the current woeful state of the economy on the use, or perhaps overuse, of LSAPs throughout the pandemic.

The Post read Conway’s speech and called him up afterwards to put a few further questions to him. Here is an outline of the issue and his response.

What are LSAPs and how were they used during Covid-19?

In Covid-19, when the economy was effectively forced to shut down, there was an “all hands on deck” effort to steady financial markets, economic activity, employment, and inflation.

The Reserve Bank immediately cut the Official Cash Rate to 0.25% - a 75 basis point cut - and committed to holding it there for a year to stimulate spending. 0.25% was the OCR’s Effective Lower Bound (ELB) - the lowest rate it could be cut to at the time without significant distortions or unintended consequences.

That wasn’t enough however, so from the RBNZ side, additional monetary policies came into play.

One of these was something that had not really been used before - Large Scale Asset Purchasing (LSAP). In short, the bank purchased $53 billion in government bonds, transfusing money into the system, and provided an additional $19 billion in bank funding via the Funding for Lending Programme.

The Reserve Bank says its modelling shows these moves helped keep financial markets in New Zealand running smoothly. By purchasing long-term government bonds, the increased demand drove down yields, lowering interest rates on other debt instruments like mortgages and business loans. More money floating around meant banks could lend more freely, and people could spend more, spurring further economic growth.

The effect, the RBNZ said, was equivalent to cutting the OCR by around 90 basis points.

The downside

The LSAP programme resulted in mark-to-market losses of around $10.5 billion for the RBNZ once the recovery kicked in and interest rates increased. That’s about 3.2% of New Zealand’s GDP. These losses occurred because the bonds were bought when interest rates were low but rising inflation after Covid diminished their value. Not all have yet been sold.

Was the use of LSAPs a “sugar hit”?

There is also the question of whether the LSAP programme proved too stimulatory - i.e., was too much of a “sugar hit” for the economy. After all, they were famously used in various countries after the Global Financial Crisis (and in fact are used far more in other countries than in New Zealand). After the GFC they, like they did in New Zealand during Covid, mitigated economic downturn by stimulating economic activity and reducing long-term interest rates, but also led to asset bubbles and heightened wealth inequality.

The Post asked Conway whether the LSAPs had, as a result of flooding the zone with cash, caused scarring to the economy in the long term - contributing to an inflation outbreak that caused interest rates to rise, slowing spending, and kicking off an economic downturn causing high unemployment that we’re still battling through today. Not to mention fuelling a housing bubble that has since popped.

It’s a different debate, said Conway.

It was important to make the distinction between judging LSAPs as a tool, and the debate on whether or not monetary and fiscal policy was too stimulatory over the pandemic - “it’s not the same debate,” he said. “Or it shouldn’t be at least, although often in New Zealand, people go, ‘oh, you over-stimulated, therefore we should never use LSAPs again’. But those are two separate issues.”

In fact, a 2022 report from the RBNZ did weigh in on the “level of stimulus” debate, saying monetary policy should have been tightened earlier in 2021, and the Funding for Lending programme should have had a mechanism to end sooner.

However, LSAPs and assertive government spending on support to households, businesses, and financial markets, helped to avert deeper economic harm at the time they were deployed, Conway said. While the combined response “ultimately contributed to an inflation outbreak”, the RBNZ ultimately believes “LSAPs are a powerful macro-stabilisation tool” that could be used again.

Negative interest rates would be better

Being able to put in place negative interest rates, where instead of receiving interest for holding money, commercial banks are charged a fee for the funds they deposit with the central bank in order to incentivise banks to lend out their money,would be the RBNZ’s preferred way of supporting economic activity in a crisis, Conway said in his speech.

“If moderately negative interest rates had been possible during the pandemic, our work suggests that could have delivered similar outcomes for growth and inflation as LSAPs, but at a lower cost to the Crown balance sheet … if [they] had been operationally available…in 2020, they would have been a preferred tool for supporting the economy.

“Even so, there will always be an [floor] for the OCR, even if it is slightly negative. Consequently, we need to remain ready to use LSAPs, in targeted circumstances, as and when required.”

Conways said retail banks didn’t have the capability to have negative interest rates in their systems in 2020: “my understanding is that we now do have that capability.”

LSAPs could be rolled out again

So if if another sort of crisis unfolded where a strong or non-traditional monetary response was needed, the first move would be to lower the OCR to some sort of negative level, but then, LSAPs might be considered again, depending on the context.

“It’s a volatile world out there - you can’t predict or forecast a pandemic - but there are shocks coming our way left, right and centre, and its definitely feasible that over the medium term or the long term we get a shock that requires the OCR to hit its effective [floor],” Conway told The Post.

“We'll keep digging and doing the research to understand more of what these additional managed policy tools look like. But you know…if the circumstances dictated, I would be comfortable reaching for LSAPs - I think it's better than watching your economy go down the toilet.”