The 122-page Review and Assessment of the Formulation and Implementation of Monetary Policy (RAFIMP) is a detailed report card on what the Monetary Policy Committee (MPC) decided to do, what worked, what it could have done better and lessons learned.
Inflation is at its highest level in 32 years. The consumers price index increased 7.2 percent annually in the September 2022 quarter, according to Stats NZ.
The review was conducted by the central bank. It found its decision to ease monetary policy during the Covid-19 pandemic was warranted and worst-case economic scenarios were avoided.
"The last five years were uniquely challenging," the report said.
"In particular, Covid-19 was a highly disruptive shock. Monetary policymakers were faced with widespread uncertainty."
However, it also found monetary policy should have been tightened earlier in 2021 including by raising the official cash rate, and curbing or halting the large-scale asset purchase programme earlier.
Despite this, the bank's report said such actions would not have completely halted rising inflation which was being heavily boosted by global supply problems.
"Beginning the monetary policy tightening earlier in 2021 would not have fully offset the strong inflationary impulse stemming from a series of supply shocks, including Russia's invasion of Ukraine."
Putting an earlier stop to the funding for lending programme, which allows banks to borrow cheaply and directly from the Reserve Bank with the aim of providing cheaper rates to mortgagees and other debt holders, could also have helped - but the bank needed to maintain trust.
"In hindsight, the FLP could have been designed with more flexibility. For example, the inclusion of an early termination clause with reasonable notice in the event of changed economic conditions could have been included, although such an amendment could potentially reduce the effectiveness."
The review identified nine areas for improvement:
• More research into the impacts of supply shocks (e.g. pandemics, earthquakes, climate change, war) on inflation
• Incorporate more and different types of higher-frequency data into the decision making process
• Develop more indicators of policy tightness and a better understanding of influences on neutral interest rates (when interest neither adds to nor curbs growth)
• Learn more about new fiscal policy instruments being developed by Treasury
• Further clarity over how the requirement to support maximum sustainable employment fits within the Reserve Bank's remit
• Continue using the LSAP programme (government bond buying) as a tool alongside OCR changes in future
• Funding-for-lending and similar programmes should include more flexibility in future so it can be shut down during periods of instability•
• The official cash rate (OCR) should remain the preferred tool for setting monetary policy
However, additional monetary policy tools should be kept ready in case needed - including being prepared to use negative interest rates
The report is broken into three periods, with the first covering the period between 2017 and 2019 when inflation was below the central bank's 1 to 3 percent target, followed by the 2020 initial response to the pandemic, and from 2021, when inflation rose above the target.
The review was conducted by the central bank, but was peer reviewed by international experts including Australian National University professor Warwick McKibbin, and former Bank of Canada deputy governor Lawrence Schembri.
It became a legal requirement in 2018, although the RBNZ said it also carried out regular reviews of monetary policy.
The review covers the MPC's decisions on the official cash rate and additional monetary policy tools introduced during the pandemic.
It comes as the National Party criticised the reappointment of Reserve Bank governor Adrian Orr for another five-year term ahead of next year's general election, saying an extension of the role would have been fairer to allow a new appointment post-election.
In a statement on Monday, Finance Minister Grant Robertson said the central bank had been going through considerable change during Orr's first term and his reappointment would make sure the changes were bedded in.
"In light of global conditions, this is also a time when stability and continuity are paramount for the Bank. Adrian has demonstrated the skills, knowledge and experience to help steer the financial system through the 1-in-100 year economic shock of the pandemic.
"I am happy to endorse the recommendation of the Board. I have full confidence that he will continue to display the same integrity and leadership in performing his duties as Governor in what is still a challenging environment."
