Independent review faults RBNZ for holding pandemic stimulus too long
An independent review says New Zealand's central bank acted well at the start of the pandemic but kept monetary stimulus in place for too long.
An independent review of the Reserve Bank of New Zealand has concluded that its initial response to the COVID-19 pandemic was appropriate and effective, but that monetary policy stimulus was left in place for too long.
The review was commissioned by New Zealand's current government, which was not in power during the pandemic. It follows a period in which inflation in the country climbed to a peak of 7.3% in the fourth quarter of 2022, prompting the central bank to raise interest rates to cool an overheated economy.
According to the review, the early monetary policy response was praiseworthy — rapid and, by New Zealand's standards, innovative in the accommodation it provided. The criticism centres on the exit: the Monetary Policy Committee was too slow to remove stimulus once conditions changed.
The review also pointed to the removal of several "guardrails" by the central bank and parliament before the pandemic. Among these was a decision to introduce a dual mandate that included a focus on employment, which gave the committee more scope to pay less attention to price stability.
A series of recommendations followed. The committee should adopt a more systematic strategy that relies less on discretion and is more resilient to uncertainty, the review said. It should give greater weight to real interest rates and near-term inflation signals, and use simple policy rules and broader scenario analysis as checks on its decisions, while taking into account likely fiscal policy responses to major economic shocks.
The review further called for regular testing of the tools used when interest rates are near their lower limit, additional resources for the committee's analysis, and a review of legal provisions that could undermine monetary policy independence.
Responding to the findings, RBNZ Board Chair Rodger Finlay said the central bank's governor and its wider team would carefully consider the report and use its insights to help inform future practice.