New Zealand central bank review supports monetary policy decisions

By Lucy Craymer

WELLINGTON (Reuters) -The New Zealand central bank’s dramatic easing in monetary policy was largely warranted over the COVID-19 pandemic, but with hindsight policy tightening should have occurred earlier in 2021, an internal report released by the central bank on Thursday found.

The internal review, which looked at how the Reserve Bank of New Zealand (RBNZ) made decisions about monetary policy in the past five years and what lessons could be learned, found monetary policy decisions were consistent with the data available at the time, while worst case scenarios were avoided.

It did find with the benefit of hindsight that monetary policy should have been tightened earlier in 2021 either by lifting the cash rate or reducing asset purchases.

New Zealand’s central bank started an aggressive tightening cycle in October 2021 and has increased the cash rate in just over a year to 3.5% from 0.25%. However, inflation remains red hot at 7.2%, well above the central bank’s target rate of 1% to 3%.

Reserve Bank chief economist Paul Conway said the current heightened level of inflation could have been lessened “at the margin” if they had started tightening earlier. He added, however, the country’s economy had weathered the economic storm created by the pandemic and Ukraine war relatively well.

Governor Adrian Orr, who has faced criticism from New Zealand’s opposition parties that monetary policy decisions have contributed to record high inflation, was reappointed by the government for a five year term earlier in the week.

Orr said in a statement that the period reviewed had been uniquely challenging and they could learn from the conduct of monetary policy.

The review identified nine areas for improvement including developing broader insight into the impacts of supply shocks on inflation, better defining the measure of “maximum sustainable employment” and being cautious in providing forward guidance in uncertain times.

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