adrian orr : finance and expenditure committee 2020 / 21 - reserve bank of new zealand annual review opening remarks by mr adrian orr, governor of the reserve bank of new zealand, before the finance and expenditure select committee for the rbnz ’ s 2020 / 21 annual review, 15 december 2021. * * * tena koutou katoa, welcome all. it is a privilege to be here with you today, alongside the rest of the reserve bank of new zealand ’ s leadership team, to report on the activities and achievements for te putea matua over the past financial year. i am very proud of all we ’ ve achieved and continue to achieve together. we have worked with government, other regulators, and financial institutions, to implement and co - ordinate a range of monetary and financial policy settings so as to continue to best meet our legislated mandates. delivering our monetary policy mandate early in 2020, when the covid - 19 pandemic began unfolding, we acted quickly to ease monetary conditions so as to cushion the economic blow, and continue to meet our price stability and employment mandate. we undertook these actions in full line of sight of other fiscal initiatives aimed at providing cash flow and confidence in the economy. we eased monetary conditions by reducing the official cash rate ( ocr ) to 0. 25 % in march 2020, where it remained until october 2021. we also developed and implemented additional monetary policy tools so as to further lower interest rates across the board. these actions, amongst broader government initiatives, meant that while the economy fell into its worst economic decline on record, it was able to rebound quickly, with consumer price inflation remaining low but positive and unemployment rising only modestly. subsequently, despite rolling lockdowns and changes in alert levels, new zealand ’ s underlying economic strength has remained, supported by generally strong household and business balance sheets, government spending and investment, and strong export returns for our key goods. the monetary policy actions we under took through the pandemic, combined with government support for businesses and jobs, have proved highly effective in preventing deflation, unnecessarily high unemployment, and financial stability concerns more generally. as the covid - 19 health situation evolved, so too has been our economic policy responses. employment is now above its maximum sustainable level, with a broad range of measures of labour market tightness at or near record levels. for example, unemployment was 3. 4 percent in the september 2021 quarter, one of the lowest rates in the

to plan to save more and not less as a result of the pandemic, despite historically low interest rates ( see right chart slide 8 ). firms, too, have built up large precautionary liquidity buffers. their cash coverage – that is, cash and deposit holdings relative to gross interest payments – is more than four times higher than at the height of the global financial crisis ( see left chart slide 9 ). firms are likely to remain hesitant to commit funds to longterm investments for as long as the crisis persists and a vaccine has not been found. such conditions may increase the lags with which policy actions are transmitted to the real economy. these lags could become longer if higher debt eventually raised the likelihood of deleveraging to repair balance sheets and restore net worth ( see right chart slide 9 ). these considerations point towards the eminent importance of fiscal policies at times of low interest rates and high uncertainty to lift the economy out of the low - inflation, low - growth trap. interaction between monetary policy and financial stability the second challenge that monetary policy is facing today relates to potential side effects, in particular related to financial stability. the pandemic highlighted that the interaction between monetary policy and financial stability is a two - way street. in the early phase of the crisis, forceful monetary policy action preserved financial stability. our measures had a strong and immediately stabilising effect on both financial markets and the health and soundness of banks ’ balance sheets. but the lower interest rates are, and the flatter the yield curve is, the greater the risk that the sign may switch over time. this is the essence of the “ gdp - at - risk ” approach, which acknowledges the non - linear relationship between financial conditions and future economic growth. https : / / www. ecb. europa. eu / press / key / date / 2020 / html / ecb. sp201104 _ 2 ~ 9afd2bf0ad. en. html 4 / 7 04 / 11 / 2020 monetary policy in changing conditions while macroprudential policies are the first line of defence against the build - up of financial vulnerabilities, it is widely acknowledged that such policies offer incomplete protection. therefore, monetary policy cannot ignore financial stability risks. house prices are one example of possible side effects. they have increased considerably in recent years. there are visible signs of house price overvaluation for the euro area as a whole, especially in metropolitan areas. [ 14