Navigating at Low Altitude: Monetary Policy
with Very Low Interest Rates
A speech delivered at the Reserve Bank of New Zealand Museum and Education Centre
On 10 March 2020
By Adrian Orr, Governor1
1
With deep appreciation of the dedicated team which has worked on these principles and tools.
Navigating at Low Altitude:
Monetary Policy with Very Low Interest Rates
Introduction
The Reserve Bank of New Zealand, Te Pūtea Matua, is tasked with promoting a sound and
dynamic monetary and financial system.2 We enable New Zealanders to get on with their
daily lives with the maximum confidence possible about their means of exchange (money),
its purchasing power here and abroad, and the reliability and efficiency of critical financial
services they rely on. This is our contribution to Aotearoa, New Zealand, to "promote the
prosperity and well-being of New Zealanders, and contribute to a sustainable and productive
economy."3
As kaitiaki (caretakers) of Te Pūtea Matua, our activities involve continuous policy
assessment as to the most effective monetary policy and financial stability tools, and their
best application. This is highlighted by the ongoing Reserve Bank Act Review, which is
aimed at ensuring we have a modern monetary and financial policy framework.4 The
optimal frameworks can change over time based on global economic activity, changing
technology, and evolving consumer and investor preferences as to how they transact and
engage with the financial system. We must be able to identify and respond to circumstances
in an optimal fashion to continue to meet our mandate for Aotearoa, New Zealand.
A significant change is confronting our work at present, namely the low global (consumer)
price inflation which has led to unprecedentedly low global nominal interest rates. Our
monetary policy framework needs to operate effectively and efficiently in this low inflation
and interest rate world, and we must be aware of the intended and unintended
consequences of our policy actions for inflation, employment, and financial stability and
efficiency.
Today, I wish to outline how we got here, what the implications are for economic policy
choices - including monetary and fiscal policy - and how Te Pūtea Matua has prepared itself
to succeed.
This speech is about making sure our monetary policy framework remains effective. I do not
discuss the outlook for our Official Cash Rate (OCR) as this is the task of our Monetary
Policy Committee. Their next assessment of the OCR is scheduled for March 25. We also
have no immediate intention to use the alternative monetary policy tools discussed in this
speech. Any perceived monetary policy signals in this speech are thus in the eyes of the
reader only and not intended by the author.
2
Reserve Bank of New Zealand Act 1989 (RBNZ Act),
http://www.legislation.govt.nz/act/public/1989/0157/latest/DLM199364.html
3
The purpose of the Reserve Bank, as set out in the RBNZ Act.
4
Treasury webpage on the Reserve Bank Act Review,
https://treasury.govt.nz/news-andevents/reviews-consultation/reviewing-reserve-bank-act
I appreciate the heightened interest in our activities in the current economic environment and
want you to rest assured that Te Pūtea Matua is fulfilling its broad role including ensuring a
well-functioning financial system.
The monetary policy mandate of Te Pūtea Matua
The Reserve Bank is legally mandated to achieve and maintain stability in the general level
of prices over the medium-term, and support maximum sustainable employment. When
achieving these outcomes we must also have regard to the efficiency and soundness of the
financial system, seek to avoid unnecessary instability in output, employment, interest rates
and the exchange rate, and set policy with a medium-term orientation.5
Our mandate is an outcome of decades of economic research and practical experience both
here and abroad. It reflects the significant economic costs of high and variable inflation, the
importance of having an operationally independent central bank with capability to achieve
and manage stability in general prices, and the economic trade-offs that will occur as
economic conditions change through time.
Our monetary policy - as in the majority of OECD countries - is typically implemented by
controlling the short-term policy rate, in New Zealand the OCR. This operates through a
simple principle: higher interest rates tend to lead to lower economic activity in the short-term
and hence lower employment and inflation than would otherwise be the case. For lower
interest rates, the opposite is true. Of course, this is simple but not easy. Underlying the
relationship are complex transmission mechanisms that link the level of interest rates to
inflation and employment.
The Reserve Bank's Monetary Policy Handbook provides a stylised guide to the monetary
policy transmission mechanism.6 Figure 1 provides a walk-through of the five main channels
from shifting the OCR through to employment and inflation. These channels are savings and
investment decisions; cash-flow access; asset prices and wealth; the NZ dollar exchange
rate; and inflation expectations.
5
Remit for the Monetary Policy Committee April 2019,
https://www.rbnz.govt.nz//media/ReserveBank/Files/Monetary policy/About monetary
policy/Remit-for-the-Monetary-PolicyCommittee-April-2019.pdf
6
Monetary Policy Handbook,
https://www.rbnz.govt.nz/monetary-policy/about-monetarypolicy/monetary-policy-handbook
Figure 1: The monetary policy transmission mechanism
Source: RBNZ.
All of the monetary policy channels discussed are affected by one significant consideration
for the economy of Aotearoa. New Zealand's economy is small and open to the swings and
roundabouts of global economic activity through our trade, capital flows, and migration.
Global economic, political, and financial market developments have a significant impact on
our domestic economic activities - and hence the appropriate monetary policy setting to
meet our mandate.
Unprecedented low global interest rates
Largely since post the 'Great Financial Crisis (GFC)' of 2008, global inflation and interest
rates have been remarkably low. New Zealand's neutral interest rate (i.e., the rate that, on
average over time, would be consistent with no over- or under-utilisation of resources and
stable inflation) has declined considerably (Figure 2), and we have had downward pressure
on domestic inflation.
Figure 2: Neutral interest rate estimates
% %
9 9
Suite of neutral interest rate estimates
8 8
Official Cash Rate
Suite (mean)
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
2006 2008 2010 2012 2014 2016 2018
Source: RBNZ.
Global inflation has been declining for a variety of reasons over recent decades (Figure 3).7
In part the low and stable inflation rates are a sign of success of central banks' focus of
monetary policy on achieving and maintaining this goal.
7
Hawkesby, C. (2019). 'Inflation Dynamics: Upside Down Down Under', speech delivered at the BIS
forum at the Bangko Sentral ng Pilipinas in Manila on 21 August 2019.
Figure 3: Inflation in select advanced economies
% %
30 30
New Zealand Australia United Kingdom United States Euro area
25 25
20 20
15 15
10 10
5 5
0 0
-5 -5
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: World Bank.
In addition, positive productivity shocks - through innovation and technology - has reduced
the prices of many manufactured consumer goods. Likewise, the advent of open global
trade and 'single price' discovery via the internet has led to competition and further
reductions in price levels and inflation.
Finally, there have been significant influences on the level of 'neutral interest rates' globally,
including ageing populations with less propensity to consume, reduced wage bargaining
leverage for workers as labour mobility and product sourcing has broadened, and declining
productivity growth as technologies have matured.
On top of these long-term trends towards lower rates, adverse cyclical events - especially
during and post the GFC - have driven many central banks to reduce interest rates to their
effective lower bound (Figure 4) as a means to stimulate demand i.e., to continue to meet
their inflation mandate.
Figure 4: Central bank policy rates in select advanced economies
Source: Bloomberg.
Monetary policy instruments in times of record low interest rates
As central banks' policy rates approached their effective lower bounds, they have had to find
other ways to influence peoples' spending/saving habits, the exchange rate, the slope of
yield curve, and the flow of credit through their economies. A growing number of central
banks have gradually introduced a set of new monetary policy measures - that are coined
as 'unconventional monetary policy tools' - to continue to meet their inflation mandate (Table
1).
These tools came under the general headings of: negative interest rate policies; lending
operations to banks; large scale asset purchase programmes (otherwise known as
'quantitative easing'); and forward guidance (telling people what the central bank intends to
do and for how long).
Table 1: Summary of unconventional monetary policy interventions
(Date of first implementation in parenthesis)
Negative Term lending Asset purchase Forward
interest rates programmes guidance
ECB
(2014)
(2011) (2009) (2013)
United
Kingdom (2008) (2009) (2013)
United States
(2008) (2008)
Japan
(2016)
(2010) (2009) (1999)
Switzerland
(2015)
(2009) (2009)
Sweden
(2009)
(2015) (2009)
Denmark
(2012)
Canada
(2008)
Sources: BIS (2019), Unconventional monetary policy issues: a cross-country analysis,
CGFS Papers, No 63; and relevant central banks.
The selection of the particular instruments was dependent on each countries' issues (i.e.,
were they aiming to boost demand and/or manage a specific market disruption) and their
financial market structure (e.g., what assets are on offer to purchase).
For example, the Bank of International Settlements (BIS) report that around 18 asset
purchase programmes were initiated by central banks between 2009 and 2016.8 Central
banks bought a host of public and private sector bonds, specific agency mortgage backed
securities, and other 'asset backed' securities (Table 2). They did so to swap central bank
cash for other peoples' assets, thereby generating liquidity and lowering interest rates.
8
BIS (2019). 'Unconventional monetary policy issues: a cross-country analysis', CGFS Papers, No 63,
October 2019.
Table 2: Large-scale asset purchases by type (as % of GDP)
Type of assets purchased
Government Mortgage- Corporate Equities
bonds1 backed bonds
securities2
Euro area 20 2 1
(27)
Japan 65 1 5
(44)
Sweden 7
(41)
United Kingdom
27 1
(33)
United States
15 14
(20)
1
Numbers in parentheses are the maximum share of government bonds outstanding that the central
bank held.
2
The ECB purchased covered bonds; the Fed purchased RMBS and agency debt.
Sources: BIS (2019), Unconventional monetary policy issues: a cross-country analysis,
CGFS Papers, No 63; and Gagnon and Sack (2018), QE: A User's Guide, Peterson Institute
Policy Brief, PB18-19.
The key outcomes were that interest rates on government bonds and corporate debt
instruments did decline, stimulating spending. There was also a smaller, but positive, impact
on credit availability. Monetary policy has been effective at stimulating economic activity
even when the effective lower bound on interest rates has been met.9
Being prepared at Te Pūtea Matua
At present inflation in New Zealand is near the mid-point of our target range of 1 to 3 percent
annual CPI inflation. The level of employment is also at, if not slightly above, our estimate of
the maximum sustainable level. Achieving these targets has in large part been down to our
setting of the OCR at 1.0 percent, well below our estimate of the 'neutral rate' of around 3
percent.
In our February Monetary Policy Statement we also outlined our thoughts for the economy
ahead, noting good economic support from both monetary and fiscal policy, household
wealth and spending, and New Zealand's strong terms of trade.10
Of course, we also remain humble as to our ability to predict the future, and I reiterate that
on the basis of our historical forecast errors, the chance that the short-term interest rate in
9
Ibid. The BIS study found that "central banks judged that negative policy rates contributed to the
achievement of their policy goals", albeit "transmission effects could be weaker ... should more
deeply negative rates be implemented".
10
Monetary Policy Statement Feb 2020,
https://www.rbnz.govt.nz/monetary-policy/monetarypolicy-statement/mps-february-2020
New Zealand could be 1 percent lower than now in two years' time is around 20 percent.
That means while an effective zero bound for interest rate is far from the most likely outcome
in New Zealand, it can't be ruled out. This is not a prediction, just a statistical observation
outlining the challenges of setting monetary policy.
An inability to predict what might happen next is no excuse for not preparing for what could
happen. That's true for businesses, governments and central banks. It is in light of both
economic theory and recent global experience that we have been assessing what alternative
monetary policy tools may be available to the Reserve Bank of New Zealand - and their
relative desirability. We are fortunate, unlike many other OECD economies, to have the time
to prepare for such possible needs.
The work we have been pursuing has involved:
• Identifying the suite of possible 'unconventional monetary policy tools' available to us;
• Defining and making explicit the criteria we would assess these tools with, against both
each other and also alternative policies all together (e.g., fiscal policy options);
Considering the relative benefits and costs of the tools, so as to operate on a 'least
•
surprise' basis, and to ensure we are working in collaboration and with the agreement of
the fiscal authorities;
• Considering not just the monetary policy efficacy of the tools, but also broader
considerations related to our financial stability and efficiency mandate; and
• Ensuring the tools are actually able to be utilised, including working with the important
financial institutions that make up our system.
Recent international experience
Our work, outlined later, has been informed by much research and recent experience
internationally, which has highlighted desirable and less desirable (sometimes unanticipated)
outcomes. There are consequences of using monetary policy - conventional and
unconventional - with different impacts on different people (e.g., savers versus borrowers).
These consequences can become more significant the longer interest rates remain low.
Evidence on the side-effects of unconventional monetary policy is emerging slowly and is
sometimes inconclusive. What is certain is that the use of unconventional policy puts the
spotlight on the central bank.
First, there are implementation questions around the selection of tools and their use. For
example, large scale asset purchases introduce the central bank into more targeted 'picking
winners' compared to the blunt interest rate instrument. We need to assess which assets are
up for sale to the central bank and why. Borrowers and savers continue to be impacted
differently as per conventional monetary policy, however the choice of which assets to
purchase significantly impacts specific parts of the financial markets and sectors of society.
The selection criteria for specific assets also needs to be clear. There is a choice to be made
between public or private assets, and then which assets. As an example, there has recently
been increasing discussion of favouring 'green' bonds over other bonds.
Second, central banks have also recently bought assets that have a long duration. Even if
they stopped now, the assets will sit on the central bank balance sheets for a long time to
come unless sold before maturity. Some of the assets may become impaired while the
central bank owns them, creating market and credit risk for the central banks' balance
sheets.
Third, central bank balance sheets (which are effectively the government's balance sheet)
have expanded greatly with the purchased assets and issued liabilities (see Table 2 for the
scale of central bank asset purchases as a proportion of GDP). The persistence of these
purchase programmes has also been far longer than anticipated at their outset, given the
ongoing low inflation pressures. The marginal impact on interest rates of new purchases is
now reducing in some countries.
Fourth, while targeted direct intervention is often positive for specific market functioning, the
unprecedented growth in central banks' balance sheets can also have unintended
detrimental impacts.11 Some challenging factors include the scarcity of bonds available for
investors to buy, squeezed liquidity in some asset markets, and fewer market operators
actively trading.
Fifth, a possibly unsurprising outcome of persistently low global interest rates and the use of
unconventional monetary policy tools has been rising asset prices. This outcome has meant
increased wealth for some, e.g., home owners and equity investors (Figure 5).
Figure 5: Global asset prices
Index Index
300 300
New Zealand Advanced economies China
250 250
200 200
150 150
100 100
Houses
Shares
50 50
2011 2015 2019 2011 2015 2019
Source: OECD, Real Estate Institute of New Zealand, RBNZ.
Note: House prices for OECD members serve as a proxy for advanced economies.
11
BIS (2019). 'Large central bank balance sheets and market functioning'. Market Committee Papers,
October 2019.
However, the overall impact of unconventional monetary policy on wider wealth and income
equality is currently unclear. Some studies find that unconventional monetary policy,
particularly large scale asset purchases, increase inequality more significantly than
conventional monetary policy.12 Other studies find the unconventional policies have had a
limited or positive impact on reducing income inequality, e.g., by supporting the income of
low income families by supporting employment.13 These possible effects need to be
considered in the context of broader fiscal policy settings.
Finally, there has been significant spill-over effects to other smaller open economies
including New Zealand. This is primarily driven by inward capital flows as investors search
for higher yields around the globe. These capital inflows have led global bond yields lower -
including in New Zealand.
The low imported interest rates have necessitated a variety of economic policy responses
across many countries - including the lowering of central bank policy rates to stem the
inflow, introducing macroprudential tools aimed at curbing excess lending, and purchasing
foreign assets to slow down upward pressure on domestic currency values.
At Te Pūtea Matua we have undertaken the first two of these responses so as to continue to
meet our inflation and employment mandate, as well as mitigate the risks of excessive
debt/lending on broader financial stability (e.g., the introduction and use of our Loan-to-Value
Ratios).14
The set of choices for Te Pūtea Matua
The Reserve Bank team is using international and domestic experience to assess the full
suite of monetary policy tools available to New Zealand. Today we published a short
document that outlines the framework we would follow if we had to use unconventional
monetary policy tools.15 Publishing this framework provides greater transparency about how
we might use these tools.
This work is about being prepared for any range of potential eventualities, it is not a
prediction of whether additional monetary policy tools will be needed. Table 3 outlines the
principles we would use to guide the use of the tools.
12
For example, Evgendis, A., & Fasianos, A. (2019). 'Monetary policy and wealth inequality in Great
Britain: Assessing the role of unconventional policies for a decade of household data'.
arXiv:1912.09702.
13
Colciago, A., Samarina, A. & de Hann, J. (2019). 'Central bank policies and income and wealth
inequality: a survey'. Journal of Economic Surveys, 0(0), 1-33.
14
RBNZ webpage on the use of loan-to-value restrictions,
https://www.rbnz.govt.nz/regulation-andsupervision/banks/macro-prudential-policy/loan-to-valuation-ratio-restrictions
15
RBNZ (2020). 'Principles for Using Unconventional Monetary Policy in New Zealand',
https://www.rbnz.govt.nz/monetary-policy/unconventional-monetary-policy
Table 3: Principles for using unconventional monetary policy
MPC Remit principles
Effectiveness Tools would be designed to provide a strong influence over inflation
and employment, to ensure that the monetary policy objectives are
achieved.
Efficiency The Committee would take into account the distortionary impact of the
tools on the efficient allocation of resources within the economy,
including between various groups and sectors of the economy.
Financial system The Committee would take into account the impact of the tools on
soundness financial system risks, to avoid the costs of financial crises.
Operational principles
Public balance The Committee would take into account the financial risks that the tools
sheet risk would create for the Reserve Bank and Crown balance sheets, to
protect public funds and central bank independence.
Operational Use of the tools would take into account the operational readiness of
readiness each tool, to ensure the transmission channels function as expected.
This includes the readiness of the Reserve Bank to implement each
tool and the readiness of financial markets and the New Zealand public
to respond appropriately to the tools.
Source: RBNZ.
Table 4 provides short descriptions of the tools themselves. Our assessments are based on
our own knowledge of the workings of New Zealand's financial markets, as well as
international experience and academic insight.
We will provide our full analysis of each of these tools against the principles we hold in
coming weeks - so that people can fully understand our thinking and, of course, provide
input.
Table 4: Unconventional monetary policy tools under consideration
Tools Description
Forward guidance This would differ from our current approach of publishing our OCR
forecast. It may involve publishing a forecast of the shadow short
rate, which shows the combined stimulus from the OCR and other
monetary policy tools through interest rates. It could also involve the
MPC announcing a commitment to keep monetary policy
expansionary, in order to hit our monetary policy targets in the
medium term, even if the MPC expect this to eventually push
inflation above 2% or employment above its sustainable level.
Negative OCR
Reduction of the OCR to the effective lower bound (the point at
which further OCR cuts become ineffective), which may be below
zero. The Reserve Bank could consider changes to the cash system
to mitigate cash hoarding if lower deposit rates led to significant
hoarding.
Interest rate An interest rate swap is a contract where one stream of future
swaps interest payments is exchanged for another. The Reserve Bank
could enter into interest rate swaps to reinforce forward guidance.
We would receive fixed rates and pay floating rates to financial
market participants. This would reduce market interest rates.
Large Scale Asset The Reserve Bank could purchase domestic government bonds to
Purchases lower interest rates and contribute to a flattening of the yield curve
(LSAPs) through the main channels of policy signalling and portfolio
balancing. Unlike the OCR, LSAPs would have more of an effect on
longer-term interest rates (2+ years), which are important for
mortgage and business lending.
Foreign asset The purchase of foreign currency or assets to reduce the NZD
purchases exchange rate and, if desired, to increase NZD liquidity. This could
include the systematic purchase of foreign assets or buying fixed
quantities on set dates.
Term lending The provision of collateralised long-term loans to banks in order to
support monetary policy transmission through the banking sector.
The loans could be provided with conditions that require banks to
increase their credit supply.
Source: RBNZ.
The monetary policy tools considered all vary as to their effectiveness, efficiency and impact
on financial soundness. They are also at various stages of readiness to be utilised.
Perhaps one of the simplest means of outlining why the tools have various levels of
usefulness is to refer back to our discussion on the transmission of monetary policy from
shifting the OCR to influencing inflation and employment. Figure 6 expands on this
transmission framework by adding in some new tools - namely forward guidance, interest
rate swaps, term lending, and large scale asset purchase programmes (of domestic or
foreign assets). The end outcomes are similar in intent, but vary through the channels of the
financial system with different degrees of impact.
Figure 6: The channels through which monetary policy tools affect inflation and
employment
(This diagram shows the different channels through which different tools ultimately end up
affecting inflation and employment. It builds on the monetary policy transmission mechanism
shown in the Monetary Policy Handbook (p52))
In light of recent international experience, some of the key considerations we now have are:
• What is the optimal sequencing of these tools if monetary policy is increasingly called
upon to stimulate the economy?
We are near ready to be able to implement a zero or slightly negative interest rates in
our operations, and forward guidance around our future actions is standard practice for
us. But we also must decide at what point we use additional tools and in what order.
• What agreement is needed between the Treasury and the Reserve Bank with regard to
the use of our balance sheet, and is it materially different to how we manage it now?
We are currently working with the Treasury to finalise the institutional arrangements that
will enable us to effectively use all of the described unconventional monetary policy tools,
if they are ever required. This includes the arrangements for handling the balance sheet
implications of unconventional tools. More fundamentally, we also need to ensure we
can coordinate an appropriate mix of fiscal and monetary policy responses if so desired.
What additional policy responses might we need to consider to manage some of the
•
consequences of low interest rates and market functioning?
We could consider additional macroprudential tools and specific market interventions to
ensure liquidity and credit flows. But we need to assess how best we communicate to all
participating in the New Zealand economy as to the purpose of our actions, and our
desired outcomes.
New Zealanders have become used to the terminology associated with our current monetary
policy activities. A low OCR is understood for its intent and implications on borrowing and
lending rates and, in part, the level of the NZ dollar exchange rate. We need to outline how
we could best translate activity in, for example, the interest rate swap market or asset
purchases, into meaningful concepts for all. We need a meaningful 'shadow' OCR concept
for ease of discussion.
To ensure they operate effectively and efficiently, we also want to ensure market participants
(e.g. banks and payments operators) can respond appropriately to the use of unconventional
monetary policy tools. While we have done a lot of this preparatory work, we have more to
do.
These considerations are all well advanced, and we continue to speak with relevant decision
makers, market participants, and technical experts over time.
Any deployment of unconventional monetary policy tools will depend on the prevailing
economic conditions, the functioning of the financial system, and the efficiency of the various
monetary policy channels. This leads us to currently favour a baseline decision set for the
purposes of cyclical demand management, assuming it is needed and superior to alternative
policy responses, of:
• Lowering the OCR;
Using forward guidance;
•
• Using mildly negative interest rates if more stimulus was needed;
• Considering the use of interest rate swaps to reduce interest rates for New Zealanders,
Considering asset purchases (e.g., government bonds) for further impact; and
•
• Utilising a combination of all of the above, as needed.
We could also introduce term lending activities if the above combined actions proved
insufficient and if retail banks are not passing on the very low rates to customers. Foreign
asset purchases could also be useful if a specific economic shock was from offshore and
resulted in an overvalued NZ dollar.
The underlying principle is that we would choose the most appropriate tool or combination of
tools, and policy coordination, for the situation at hand. For example, if an economic
disturbance resulted in significant disruption to the functioning of the financial system, this
would naturally alter the stylised ordering outlined above.
Over reliance on one tool
"Give a man a hammer and everything becomes a nail". Just as for building, economic policy
needs the right tools for the job and no one tool can do everything.
All of the conventional and unconventional monetary policy interventions discussed will be
more effective when coordinated with supporting whole-of-government intervention activities.
Changes in government consumption and investment, the use of automatic stabilisers,
welfare transfers, and varying tax rates all have cyclical as well as structural/permanent
impacts on economic activity in a modern economy. This simple observation appears to be
one of the most ignored factors globally in recent economic history.
A government's fiscal policies can deliver similar outcomes for short-term inflation and
employment as to monetary policy. However, fiscal retrenchment occurring simultaneously
with monetary expansion is akin to one foot on the brake, the other on the accelerator. At
times this makes economic sense, but not all of the time.
If a government's fiscal credibility is low, then investors may be more comfortable with a
government focusing purely on debt reduction and fiscal restraint. However, if a
government's debt is low, and there are significant long-term benefits to spending and/or
investing, then a more expansionary fiscal stance can make sense.
Here in New Zealand, for example, the Government recently opted to increase and bring
forward its infrastructure investment.16 This action has supported monetary policy in
meeting its mandate, increasing activity and employment.
The nature of the economic shock that authorities may be looking to mitigate will inform the
choice of tools. A specific supply shock (where goods and services cannot be produced for
16
Budget Policy Statement 2020,
https://budget.govt.nz/budget/2020/bps/delivering-for-nzinfrastructure.htm
some reason) may be better managed through fiscal support (both automatic stabilisers
and/or targeted intervention), with monetary policy assisting rather than leading.
New Zealand's current drought conditions in regions of the North Island provide an example
of a supply shock. If the drought remains relatively region-specific, and/or short-lived, then
monetary policy would have a very limited stabilisation role. Any resulting loss of production
may be short-term, and automatic fiscal stabilisers and/or targeted government transfers and
spending would be more effective at mitigating any broader economic disruption.
Meanwhile, monetary policy would remain focused on any longer-term impacts on incomes
and wealth, and hence inflation and employment pressures.
A similar set of considerations confronts policymakers globally at present with the spread of
the Covid-19 virus. The eventual economic impact on global supply and demand will
depend on the location, severity, and duration of the virus. The optimal mix of policy
responses are driven by these same factors.
The severity in terms of disruption to economic activity depends on how the virus is
contained and controlled, how long this will persist, and the collective response of
governments, officials, consumers, and investors to these events.
The Reserve Bank's Monetary Policy Committee will be picking through these supply and
demand issues. We will need to account for international monetary and fiscal responses,
financial market price changes (e.g., the exchange rate and yield curve), and domestic fiscal
responses and intentions, to inform our response. We also remain in regular dialogue with
the Treasury to assess how monetary and fiscal policy can be best coordinated.
We need to be considered and realistic as to how effective any potential change in the