Challenges, risks, and cautious optimism
Reserve Bank Governor Adrian Orr (pictured above) shared insights on navigating monetary policy at the Peterson Institute in Washington, D.C., coinciding with the IMF and World Bank Annual Meetings.
In his speech, he discussed New Zealand’s progress in managing inflation and the uncertainties of economic policy.
Inflation target back on track
Orr highlighted the positive news that consumer price inflation in New Zealand has reached 2.2%, bringing it close to the midpoint of the Reserve Bank’s 1-3% target range. “That’s something to celebrate,” he said, noting the importance of maintaining steady inflation in the post-pandemic economy.
Navigating monetary policy
Drawing an analogy to ocean navigation, Orr described the complexity of managing monetary policy.
“Navigating monetary policy, with a one- to two-year lag between policy action and ultimate outcome, is akin to ocean circumnavigation,” he said. “When setting monetary policy, we have a clear – unmovable – destination in mind.
“However, we only have a reasonable sense of where we are currently located, and only partial knowledge of the sturdiness of the economy and the effectiveness of policy instruments.”
Orr stressed the need to remain alert to unexpected risks.
“We must also be cognisant of unanticipated risks ahead, and at times act swiftly to avoid perils,” he said. “First, stay afloat.
For monetary policy makers, peril includes a long and persistent downturn, with monetary policy stuck at the effective lower bound, or an inflationary spiral. Over recent years, global monetary policy navigators have had to act fast to avoid both perils.”
Policy easing, but challenges remain
Orr noted that although it is encouraging to ease monetary policy in New Zealand, interest rates remain higher than desired to counter any residual inflationary forces.
“It is now pleasing to be able to ease monetary policy in New Zealand, but it’s still at a level we think is restrictive, so as to work against any remaining inflationary tendencies that may linger.”
Waiting for inflation to subside
A pressing concern for the central bank is the timeframe required for inflationary pressures to fully ease.
“The sooner this happens, the sooner we will be able to claim that the inflation caused by COVID-19 – amongst other severe shocks – is behind us,” Orr said.
Optimism for the road ahead
Despite the uncertainties, Orr offered a cautiously optimistic outlook.
“We are in a situation where we can provide the perspective of an economy returning to low and stable inflation, interest rates becoming less restrictive, and economic activity being revitalised. But that is just the most recent navigational plot on the ocean chart,” he said.
Read the RBNZ media release here. Download the speech here.
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