RBNZ reports strong progress on post-COVID monetary policy reforms

The Reserve Bank (RBNZ) has published new research into monetary policy in the aftermath of the COVID-19 pandemic, outlining progress on recommendations made in its 2022 review of policy formulation and implementation.

The 2022 Review and Assessment of the Formulation and Implementation of Monetary Policy (RAFIMP) made nine recommendations aimed at strengthening the Monetary Policy Committee’s (MPC) ability to manage economic shocks and uncertainty.

Chief economist Paul Conway (pictured) said the latest update reflects clear progress in addressing those recommendations.

“The MPC has gained valuable insights into how economic activity, price setting by businesses, and inflation expectations evolve during periods of high inflation and economic volatility,” Conway said in a media release.

“We now have a deeper understanding of supply shocks and structural drivers of inflation and have expanded our use of high-frequency data for more timely and granular monitoring. We have developed new tools to estimate neutral interest rates and run scenario analysis. These improvements ensure the MPC is well equipped to navigate future shocks while maintaining price stability.”

Conway said the 2022 review prompted a coordinated programme of research and policy development.

“We’ve made strong progress on all recommendations, enhancing our ability to respond to future inflationary pressure and economic volatility,” he said.

Interim lessons from inflation response

The RBNZ also released early findings from its review of the MPC’s response to above-target inflation between 2021 and 2024. The review forms part of continuous evaluation of monetary policy and will feed into the next full RAFIMP assessment in 2027.

The bank noted that its strategy helped reduce inflation from its 2022 peak to within the 1-3% target band by September 2024, while anchoring longer-term inflation expectations around the midpoint of the target range.

In hindsight, Conway said a faster or sharper tightening could have reduced inflation earlier.

“But this would have been difficult given the data available at the time and could have conflicted with the MPC’s mandate back then, which included maintaining maximum sustainable employment,” he said.

Forecasting and communication under review

RBNZ acknowledged that decision-making during 2021-2024 was hampered by significant data uncertainty but said forecasts have become more accurate as pandemic disruptions have eased.

Communication of the MPC’s strategy was considered “generally clear,” though improvements are needed, particularly in how the forward OCR track is presented to markets and the public.

Despite challenges, Conway said the MPC delivered on its inflation mandate.

“We are consistently assessing our performance in maintaining low and stable inflation, which is the best contribution we can make to improving New Zealand’s long-run economic performance. The work released today provides a useful interim update ahead of our next full review scheduled for 2027,” he said.

The update comes as the RBNZ prepares for new leadership, with Swedish economist Anna Breman set to begin a five-year term as governor on Dec. 1. She will be the first woman and non-New Zealander to lead the central bank in its 91-year history.

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