The Covid monetary policy review is thorough. But Raf Manji points out it still missed a tool that was actually used elsewhere

By Raf Manji*

The independent review of the Reserve Bank’s Covid-19 monetary policy, released this week, is a serious piece of work. David Archer and Athanasios Orphanides have done what these exercises rarely manage: gone back through the real-time forecasts, decomposed the forecast errors, and shown precisely how a “praiseworthy” initial response curdled into a year-long failure to notice the economy had already recovered. Inflation hit 7.3%, unemployment fell to an unsustainable 3.2%, and the correction cost the country a recession that didn’t need to happen. The review is honest about all of it.

What it doesn’t do is examine the one tool that might have avoided the mechanism it identifies as the problem.

Back in March 2020, I argued in these pages that the Reserve Bank should not follow the offshore quantitative easing (QE) playbook — buying government bonds from commercial banks on the secondary market — and should instead have the Reserve Bank purchase bonds directly from Treasury at zero cost, putting money straight into productive spending rather than bank balance sheets. The argument at the time was simple: this was a liquidity crisis, not a credit crisis. Businesses weren’t short of access to credit; they were shut by law. Cheap credit doesn’t help a business that isn’t allowed to open. What helps is cash, delivered directly and without a banking-system detour that, as the review itself now documents, ended up inflating housing rather than production.

I’m not raising this to relitigate 2020. I’ve read the review closely, and my proposal isn’t in it — not in the sections on alternative tools, not in the list of people consulted, not in the references. That’s a fair reflection of how these things go: crisis policymaking gets made by people already inside the tent, and unorthodox proposals get filed under “money printing” and dismissed before they’re examined. I understand why. What’s harder to understand is why it’s still missing from a review conducted five years later, with the benefit of hindsight and a stated mandate to examine the full range of tools available.

Because this isn’t a hypothetical anymore. Bank Indonesia ran essentially this model in 2020. The central bank bought government bonds directly, at a coupon pegged to its own policy rate, and returned the resulting yield to government the same day it was paid — a zero-cost facility in substance. It was capped to calendar year 2020 with an announced exit strategy, and it funded healthcare, social welfare and business support directly rather than through the banking system. It wasn’t costless as a matter of principle — Indonesia’s central bank had to manage reserve growth and answer real questions about independence — but it worked as an emergency measure, did what it was designed to do, and was wound down on schedule.

Compare that to what New Zealand actually did. The review documents that the Funding for Lending Programme (FLP) handed banks cheap central bank funding they didn’t need — its own words are that the facility’s merits were “doubtful even at the time,” and that banks were “happy to substitute cheap Reserve Bank funding for more expensive alternatives.” 

Large-scale asset purchases, meanwhile, fed a housing boom the review now says was “likely an underappreciated driving factor in real time.” Two tools, both routed through bank balance sheets, both contributing to the overheating the review spends 40 pages dissecting. A tool that bypassed that channel entirely was sitting on the shelf, unexamined, the whole time — and was actually in use next door in the region while we were building the case for FLP.

The review makes a sound recommendation that alternative monetary policy instruments should be “periodically reviewed and tested” for operational readiness, the same way negative interest rate policy should have been but wasn’t. I’d suggest that future review explicitly include a bounded, sunset-clause version of direct government financing as one of the instruments on the list — not as a standing tool to be used lightly, but as a tested option rather than an unexamined taboo. New Zealand went into 2020 with negative rates on the shelf but the banks not ready to implement them. We shouldn’t go into the next crisis with an alternative to bank-mediated stimulus that nobody has even looked at.

*Raf Manji is a principal research fellow at the Institute for Indo-Pacific Affairs, works on global financial architecture through Sustento Advisory Services, and was formerly chair of the Christchurch City Council Finance Committee.