RBNZ overhauls toolkit after pandemic inflation hurdles

Paul Conway, chief economist at the Reserve Bank of New Zealand (RBNZ), said they’ve taken key lessons from the recent surge in inflation and are now better prepared for the next economic shock. rbnz 

In Wellington, Conway explained that the Monetary Policy Committee now has a clearer picture of the links between economic activity, price setting, and inflation expectations in turbulent times.

He commented, “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.” 

He added that the bank has developed ways to gauge neutral interest rates and conduct scenario testing, leaving policymakers better prepared to maintain price stability in turbulent times.

This follows New Zealand Prime Minister Christoper Luxon’s recent comment that he spoke with RBNZ Governor Christian Hawkesby about the New Zealand economy. When asked whether he wished he had encouraged a bolder move to the governor, he said, “Pretty much, yeah.” Though he noted that, “I can give my views, but I do respect the independence of the Reserve Bank under legislation.”

New Zealand law includes elaborate renderings to insulate (RBNZ independence). It is unusual for a prime minister or a cabinet official to comment publicly on rate decisions. ECB President Christine Lagarde warned that political interference in monetary policy threatens to destabilize economies.

RBNZ recognised it had forecast errors in the pandemic period

The RBNZ has been faulted for falling behind the curve after COVID-19. Officials, nevertheless, admitted that the former dual mandate had made it harder to prioritize inflation control. Conway noted that, in retrospect, stronger action might have helped back then, but policymakers had to weigh the risk of hurting jobs given their dual mandate. He stated: “In hindsight, an earlier or more aggressive tightening might have reduced inflation sooner.”

The bank’s decision to raise the official cash rate from 0.25% in October 2021 to 5.5% in May 2023 also fueled public criticism. Not to mention, the bank struggled to produce accurate forecasts during the pandemic, when unusual economic shocks threw off its models. The bank noted that private analysts and other central banks also struggled with big forecast misses during that time. Still, it argued, since November 2022, its accuracy has nearly returned to pre-pandemic levels. 

RBNZ also acknowledged that the scale of pandemic-era fiscal easing had a bigger impact than expected, prompting efforts to refine its fiscal analysis and deepen collaboration with Treasury. The bank said it is ensuring it can quickly deploy tools like large-scale asset purchases or negative rates should future conditions demand them.

It further noted, “Over the past two decades, neutral interest rates have declined significantly, both in New Zealand and globally. This structural shift increases the likelihood that the OCR could reach its effective lower bound in future downturns.”

Though it claimed that as of late 2021, the country’s major banks had the systems in place to operate under a negative cash rate.

New Zealand’s economy fell 0.9% in Q2

New Zealand’s GDP contracted more than expected in the second quarter as construction shrank and global jitters sapped demand, adding to calls for beefier easing when the Reserve Bank next meets in October. Official data on Sept. 18 indicated that GDP fell 0.9% in the second quarter of 2025, three times the 0.3% drop predicted by analysts and the RBNZ.

The country’s economy has shrunk in three of the last five quarters, with annual GDP falling 0.6%. The markets are now lifting their bets for OCR reductions to 58 bps, with odds of a half-point cut in October rising to 20%.

Westpac’s senior economist, Michael Gordon, believes the construction, manufacturing, and professional services were the biggest drags on the economy. Nonetheless, Conway insists they are working to improve the country’s long-run economic performance.

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