donald t brash : should the reserve bank of new zealand have eased as fast as the federal reserve? speech by dr donald t brash, governor of the reserve bank of new zealand, to the rotary club of auckland, auckland, new zealand, 21 may 2001. * * * introduction over recent days, the reserve bank of new zealand has puzzled a lot of people – indeed even angered a few! – because we have been slower to ease monetary policy than they have expected or wanted, and slower than central banks in some other countries. surely, it is argued, the reserve bank must be able to see that the world economy has slowed sharply, and monetary policy should be eased. surely, it is argued, the reserve bank must be able to see that the domestic economy has been sluggish, business and consumer confidence are down, and monetary policy should be eased. surely, it is argued, the reserve bank must be able to see that the drought has been serious and will have a potentially big impact on production next season, and monetary policy should be eased. surely, it is argued, the reserve bank must be able to see that the us central bank, the federal reserve, has eased policy by much more than has been the case in new zealand. given the record of growth with low inflation which the us economy has achieved over the last decade, surely this suggests that the reserve bank of new zealand should be following the fed's example, and easing monetary policy more aggressively. certainly, the american central bank has cut its official interest rate by 250 basis points since the beginning of the year. the australian central bank has cut its official interest rate by 125 basis points since the beginning of the year. and to date the new zealand central bank has cut its official interest rate by a rather more modest 75 basis points since the beginning of the year. and forecasts of the parts of the global economy of most relevance to new zealand, compiled in london by an organisation called consensus forecasts, continue to be revised down. back in november, as we prepared our december monetary policy statement, the consensus forecast for the 14 countries of most relevance to us had growth in those countries this year at 3. 5 per cent. three months later, that forecast had been revised down to 2. 9 per cent. now, the forecast is only 2. 3 per cent. surely, it must be obvious to the reserve bank that the world economy is going to continue to get weaker, and monetary policy must be

eased urgently. the most important point i want to make to those who run these arguments is that, just because other central banks have eased monetary policy substantially, the reserve bank of new zealand is not necessarily remiss in taking a somewhat different course. why? simply because every national economy is unique. monetary policy is not a race, with every central bank trying to get to the finishing line first. it is about adjusting interest rates to influence demand within a specific economy to ensure price stability in that economy. what is right for one country might well be entirely wrong for another. so while of course it is important that we in new zealand are aware of what other central banks are doing – because their actions may say something about their economies which could be relevant to inflationary pressures within new zealand – matching the decisions of other central banks point for point will often make no sense at all. should we in new zealand have been easing monetary policy more quickly than we have been doing? or in other words, will the slow - down in the world economy reduce inflationary pressures in new zealand so much that some time in the next year or so inflation will fall towards the bottom of the agreed 0 to 3 per cent target band? still plenty of risks in the world economy it is certainly possible to imagine some very pessimistic scenarios which would warrant a major further easing of interest rates in new zealand, or indeed make us wish that we had eased more quickly over the last few months. in june 1999, i was one of three central bank governors who gave speeches in answer to the question " is deflation a risk? " at a seminar held in conjunction with the annual meeting of the bank for international settlements in basel, switzerland. my task was to sketch out a situation in which the world economy found itself in a situation of generalised deflation. i found it disturbingly easy to do. two years later, there are still considerable risks. while the high - tech parts of the us equity market have fallen from stratospheric levels to more moderate levels over the last year, the market capitalisation of the stocks in the s & p 500 index, which reached a peak of 132 per cent of us gdp in march 2000, remains at around 110 per cent of us gdp, compared with an average for that ratio of just 50 per cent over the last 75 years. or to put the matter differently, the us share - market appreciated between 1982 and the year 2000 at a rate five times faster than