The Reserve Bank of New Zealand’s (RBNZ) post-pandemic interest rate decisions and Large-scale Asset Purchases (LSAP) scheme contributed to inflationary pressures in 2021 and 2022, an independent review has found.
“Monetary policy was excessively accommodative during [New Zealand’s] recovery from the [Covid-19] pandemic, [which led] to an overheating of the economy in 2021 and 2022,” according to the Government-commissioned review released on 22 September.
“[The bank took] a full year … to adjust to the reality that [New Zealand’s] initial economic stimulus had already achieved [its] intended result,” the review found. RBNZ’s Monetary Policy Committee (MPC) voted to lift the bank’s overnight cash rate from 0.25% to 0.5% in October 2021. At that stage, New Zealand’s annual inflation rate hovered around 4.9%, data from Stats NZ show.
But the review – conducted by former RBNZ Assistant Governor David Archer and former Central Bank of Cyprus Governor Athanasios Orphanides – praised RBNZ’s initial response to the Covid-19 pandemic. The bank’s ‘Least Regrets’ approach and quick rollout of LSAP prevented compounding collapse and market dysfunction, Archer and Orphanides wrote.
RBNZ bought NZ$53 billion of New Zealand bonds between August 2020 and July 2021, under its LSAP scheme. The bank expects to eliminate its bond holdings by mid-2027 through sales and maturities, it said in June 2022.
RBNZ responded slowly to New Zealand’s post-pandemic recovery because of existing institutional and policy vulnerabilities, according to the review. “A different group of intelligent people, under [its existing] framework, would risk making the same mistakes,” the review found.
The bank’s medium-term inflation targeting policy raised the cost of forecasting errors, and consensus decision-making in its MPC made errors more likely by failing to encourage diversity of thought, according to Archer and Orphanides.
RBNZ’s MPC structure failed to encourage a broad range of policy perspectives, the pair said. The Committee did not prominently discuss inflation and excess stimulus risks in late 2020 and early 2021, they added.
“[RBNZ] will consider the findings of the [review], and its insights will contribute to [the bank’s] thinking,” RBNZ Governor Anna Breman said on 22 September. The review could also help to strengthen the bank’s modelling infrastructure and inform its view of the MPC Remit, Breman added.
The MPC’s post-pandemic strategy helped return inflation to its target band, but a faster policy response could have produced better inflation outcomes, the RBNZ said in a 2025 internal review.
By Avinash Govind