A review by the Reserve Bank of New Zealand (RBNZ) has concluded that its response to above-target inflation between 2021 and 2024, while ultimately effective, could have benefited from earlier or more aggressive measures. The central bank increased the official cash rate from 0.25 per cent in October 2021 to 5.5 per cent in May 2023 as inflation peaked at 7.3 per cent in the third quarter of 2022. The increase in the cash rate is seen as a factor that contributed to the current economic slowdown in New Zealand.
The review assessed the Monetary Policy Committee’s (MPC) strategy and found it successfully returned inflation to the target band of 1 to 3 per cent, also keeping longer-term inflation expectations near the target midpoint. Despite this success, the RBNZ now suggests that a quicker or more forceful tightening of monetary policy might have led to a more rapid reduction in inflation.
According to a statement from Reserve Bank of New Zealand chief economist Paul Conway, such a move would have been difficult, considering the information available at the time. He added that it could have conflicted with the MPC’s mandate at the time, which included maintaining maximum sustainable employment.
It should be noted that the Reserve Bank of New Zealand is the central bank of New Zealand. Its primary function is to operate monetary policy to maintain price stability, promote full employment, and support sustainable economic growth. In 2023, the New Zealand government reinstated a single, inflation-targeting mandate for the central bank.
