The Reserve Bank held interest rates at record lows longer than it needed to during the pandemic, driving inflation to record highs and triggering a boom-bust cycle the country is still paying for, a review has found.
The economy "overheated to an historically extreme degree", according to the review's findings released earlier this afternoon by former Reserve Bank assistant governor David Archer and MIT professor Athanasios Orphanides.
They also wrote that a law change by the previous government giving the bank a dual mandate to support employment, as well as control inflation, also helped to steer decision-makers away from price stability - but noting it was one of only multiple factors.
Finance Minister Nicola Willis, who commissioned the report, said it showed the bank was "too slow to take its foot off the accelerator" back in the period between 2020 and 2021.
“I expect the bank to consider these recommendations carefully and report publicly on its response," she said.
But Willis didn't commit to taking on recommendations from the review for politicians.
"The Government also acknowledges the review’s recommendations around the interaction between financial governance and monetary policy and will consider further advice," she said in a media release.
Dual mandate decision still under scrutiny
The reviewers were careful to praise the bank's early crisis response, calling it "praiseworthy" and describing the emergency support as timely and much-needed.
Labour questions the political motivation of a review due to release findings six weeks out from an election. (Source: 1News)
In 2020, the bank cut the official cash rate to 0.25% and began buying billions in government bonds, a form of money-printing to stimulate a depressed economy.
But the economy recovered better than almost anyone had expected and policy didn't seem to follow, according to Archer and Orphanides.
"It took a full year for policy to adjust to the reality that the initial economic stimulus had already achieved the intended result. Unexpectedly positive incoming data were discounted, and upside risks to the inflation outlook downplayed," the reviewers wrote.
Second and final phase of the Covid inquiry covered the period from February 2021 to October 2022. (Source: 1News)
Unemployment fell to 3.2%, which the review called "an unsustainable historic low" and inflation peaked at 7.3%, well above the target.
In her reaction, Willis singled out the previous Labour government's decision to broaden the bank's mandate to include supporting maximum sustainable employment, which the reviewers themselves had found "downplayed the importance of price stability".
“One of this Government’s first actions on taking office was to restore the bank’s single focus on inflation, as the greatest contribution monetary policy can make to employment in the medium term is keeping inflation under control," she said.
“The reviewers also welcomed changes made to the monetary policy committee charter earlier this year to encourage diversity of thought in … decision-making.
"Those changes include making committee members’ votes public when there is not consensus and making it easier for … members to discuss their views publicly."
Critics had earlier questioned the timing of the review's release, which has been dropped just 46 days before the election and days before Parliament rises.
Willis had pushed for an independent review while in opposition, after former bank governor Adrian Orr was reappointed by the previous Labour government in 2022.
Opposition parties have labelled the review's September release, just months out from the election, as "a bit sus". (Source: 1News)
The review noted multiple factors which drove the incorrect decisions on rates.
Before Covid, the reviewers criticised the bank's own decisions to curtail scenario analysis and to build a committee that favoured consensus over "diversity of thought".
One of the review's findings was that the bank kept effectively loosening monetary policy even while it was publicly tightening.
Because inflation was climbing faster than the official cash rate, the real interest rate - official cash rate minus inflation - "continued to decline, and reached historic lows, even after the [bank] communicated withdrawal of stimulus and hikes".
Reviewers said the real rate was "rarely discussed" in the committee's communications.
Modelling in the report looked at three alternative paths for how it could have gone differently. Reviewers found one - starting to lift the official cash rate earlier but moving gently - would have kept inflation below 5% and avoided a boom-bust cycle altogether.
New Zealand currently records 11 deaths a week from the virus and close to 200 people being admitted to hospital. (Source: 1News)
They noted that this would have gone to better support both price stability and unemployment objectives, which Labour had mandated the bank carry.
"Had the monetary policy committee implemented policy as in scenario 3, it would have fulfilled its dual mandate considerably better," they wrote.
"Policy under scenario three would have contained the rise in inflation and also kept the unemployment rate closer to its maximum sustainable level."
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