How rates shape the economy
In a speech at the Citi Australia and New Zealand Investment Conference, Reserve Bank assistant governor Karen Silk (pictured right) discussed the influence of monetary policy on financial conditions, highlighting how central bank actions affect New Zealand’s economy through the banking system.
How monetary policy shapes lending and spending
Monetary policy directly influences bank funding costs, which in turn affect the lending rates offered by financial institutions.
These changes impact how much households and businesses spend, save, or invest, playing a crucial role in economic demand.
Tight policy designed to curb inflation
Silk noted that restrictive monetary policy settings were introduced post-COVID to control inflation. These measures have successfully weakened demand, helping steer inflation back towards the Reserve Bank’s (RBNZ) target midpoint of 2%.
COVID-era liquidity softened recent rate increases
However, the pandemic-era stimulus boosted liquidity in the banking system, resulting in lower funding costs for banks.
This dampened the impact of recent rate hikes, making financial conditions less restrictive than in previous monetary tightening cycles.
Financial conditions returning to Pre-COVID norms
Silk explained that as liquidity drains from the banking system, funding conditions are slowly returning to pre-COVID norms.
As a result, future reductions in wholesale interest rates may not translate directly into lower lending rates, as banks seek to preserve their net interest margins.
Monitoring economic trends to manage inflation
Silk emphasised the importance of ongoing monitoring to maintain the desired financial conditions and ensure that monetary policy remains effective.
“We remain confident that inflation will converge back to the 2% target midpoint in the medium term,” she said, adding that RBNZ will continue to assess risks to keep inflation on track.
Balancing economic risks and policy adjustments
While policy tools are working to achieve inflation goals, Silk stressed that RBNZ will remain vigilant to economic shifts and make necessary adjustments to ensure inflation returns sustainably to target.
Visit the RBNZ website for the media release. You can also watch the video and download the speech.
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