As inflation started rising, the Reserve Bank should’ve acted faster to fight it, a major report has found.
Mistakes were made and improvements are being promised by the Reserve Bank.
The 110-page report, In retrospect: Monetary Policy in New Zealand 2017-22, carried out by the central bank details how New Zealand’s economy has weathered the pandemic and Ukraine war relatively well compared to other countries.
But the report admits there are important lessons to be learnt.
In particular, the Official Cash Rate (OCR) should’ve been lifted earlier to combat growing inflationary pressures in 2021.
In 2020, the Reserve Bank took a "least regrets" approach to monetary policy as the pandemic battered Aotearoa and the world.
That meant slashing the OCR to 0.25% and launching a large scale money printing programme.
It was aimed at keeping unemployment down and the economy steady, and largely worked.
"The New Zealand economy has weathered the pandemic and war in Ukraine relatively well in international comparison," the report said.
"However, there are important lessons to be learned from the experience of the past five years."
By May last year, the Reserve Bank was predicting inflation would be below 2% by 2023. Instead, it’s currently at 7.2%.
Inflation started rising rapidly at the end of 2021 around the world. In August last year, the OCR was held at 0.25%, with the Reserve Bank making it clear it would’ve increased it if wasn’t for the sudden level four lockdown. And by October, the rate began rising and has continued to do so since then.
At the same time, the bank started winding back the Large Scale Asset Purchases programme launched in 2020, given increasing the domestic pressures on labour and capacity – because of the risk of the programme being inflationary. It went back to relying on the OCR.
The report finds the bank was "nimble and responsive" to the pandemic in taking the path of least regrets. The moves it made around the LSAP were "highly effective" and kept financial markets stable. The worst case scenarios – long term double digit unemployment and a recession – were largely avoided.
But it admits monetary policy could’ve been tightened earlier in 2021, in hindsight.
"The committee could have supported an earlier tightening of financial conditions through explicitly endorsing a lower volume of weekly asset purchases, or reducing the overall size of the LSAP programme, or halting LSAP earlier.
"In hindsight, the Committee could have raised the OCR earlier. The Committee was relatively cautious in tightening policy given significant uncertainty around the outlook for inflation, employment and growth."
It notes that moving faster would not have offset the strong inflation pressures caused by Russia’s invasion of Ukraine or the various climate-related supply shocks.
The Reserve Bank has faced growing criticism from opposition parties and some economists of it’s handling of monetary policy during the pandemic.
Despite that, Finance Minister Grant Robertson reappointed Adrian Orr as Governor of the Bank earlier this week, for another five year term.
Nine areas of improvement have been identified and a number of recommendations have been made, including continuing to use the OCR as the main tool for setting monetary policy, more research into how supply side shocks (such as a pandemic or climate change) impact inflation and having more flexibility around additional tools if they are needed.