RBNZ cleared of criticism over handling of pandemic

A review by the Reserve Bank (RBNZ) has said it dealt with the pandemic well but it still made some mistakes.

This comment came in a report on how well the bank determined monetary policy from 2017 to 2022.

Its findings were largely supported by two international reviewers.

The report said the bank's Monetary Policy Committee engaged in “agile and nimble decision making” in response to the pandemic. These were a resolution to reduce the Official Cash Rate (OCR) to 0.25%, as well as buying Government bonds (LSAP) and making cheap loans available to banks (FLP).

The report says the dramatic easing in monetary policy was largely warranted during the pandemic, as managing future high inflation down, rather than dealing with deflation and economic depression, was likely to be the least-regrettable option.

It adds the LSAP programme successfully restored functionality to financial markets, and FLP provided additional stimulus and supported confidence in the banking system. . The LSAP programme put significant downward pressure on government bond yields and the exchange rate during the pandemic, while the FLP reduced bank funding costs and retail interest rates.

The review also found the Monetary Policy Committee's dual mandates of fighting inflation and maximising employment objectives were not in conflict over the review period. This finding rebuts repeated criticism that the bank's two mandates can undermine each other.

The review also had some criticism of the bank. It did not communicate its objectives to the public well enough and it underestimated the impact of fiscal policy, such as Government support payments, on the way the pandemic was dealt with.

It could also have been more flexible with FLP, which would have allowed an early termination of the programme as economic conditions improved.

FLP has been charged with helping to propel the housing market higher, when homes were already deemed too expensive even before the pandemic.

In addition, monetary conditions could have been tightened earlier in 2021, by reducing the scale of the LSAP or curtailing it earlier. In addition the OCR could have been raised earlier.

The review said the bank could develop broader insight into the impacts of supply shocks on inflation, and make other improvements such as seeking new sources of data for economic monitoring.

In a peer review, a former deputy governor of the Reserve Bank of Canada, Lawrence L. Schembri, said the formulation and implementation of monetary policy was consistent with its primary objectives regarding prices and employment.

Another peer review by a professor of economics at ANU, Warwick McKibbin, had a similar opinion.

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