During this unsettling time of COVID-19 public confidence in our financial system is critical. This is why the Reserve Bank of New Zealand – Te Pūtea Matua – takes its mandate of promoting monetary and financial stability as sacrosanct. We rely heavily on our core values of integrity, innovation and inclusion to succeed. These values are our bedrock which ensured we were prepared for the challenges COVID threw at us, and will continue to allow us to respond quickly as the situation evolves.
Our Monetary Policy Committee agreed that a ‘least regrets’ policy response was to ease monetary conditions significantly. We determined that it is better to risk doing too much too soon, rather than too little too late.
We have cut the Official Cash Rate significantly and implemented large scale asset purchases of domestic government bonds, also known as Quantitative Easing. This has been very effective in lowering borrowing costs for households and businesses.
It will take time, however, to know how households and businesses can and will respond to the stimulus, and how it will effect inflation and unemployment.
Monetary policy can only do so much. We can create the environment to spend and invest, but we cannot force it to happen. The outcome instead depends on confidence amongst households and businesses. It also highlights why fiscal policy has been at the forefront of economic support globally – governments are able to directly spend and invest, and ensure resources are mobilised.
This does not diminish our important support role in giving our economy the best chance of thriving. Just as the pandemic evolves, the Reserve Bank’s activities, capability and capacity must evolve too.
We are now actively preparing a package of additional monetary policy tools to support the economy if required. The additional tools include negative wholesale interest rates and direct funding to banks.
To be effective, the design of the package needs to ensure our monetary policy decisions have their maximum impact on businesses and households without creating undue risk. This is why we are looking at a package of options that can best achieve this outcome.
While these tools might appear new and novel, they have been in use overseas and in some cases used here in the past. We are in constant communication with our international colleagues to learn from their experience. What is unique is the impact these policy actions have on the outcomes we are trying to achieve in Aotearoa.
Some worry our actions will just push up asset prices, benefiting the rich and further widening the gap between the ‘haves’ and ‘have nots’. We acknowledge that lower interest rates are one factor that can support asset prices, which then support the economy by making people feel more inclined to spend and invest. But we strongly believe that the best contribution we can make to our monetary and financial stability mandates is heading off unnecessarily low inflation or deflation, and high and persistent unemployment.
Unemployment worsens economic wellbeing and underpins income inequality. Periods of unemployment are both more likely and persistent amongst people with lower skills or a more transitory attachment to the labour force. These characteristics are most evident, for example, amongst our youth, females, and Māori and Pasifika populations. The biggest contribution we can make right now to economic wellbeing is to improve all New Zealanders’ job prospects through lower interest rates.
Of course we are not the only ones with an important role to play. Our banks are in a strong financial position to support their customers’ best long-term interests. This is not simply saying ‘yes’ in the good times and ‘no’ in the tough times. Sound support given to customers today will help to ensure better customer and bank outcomes tomorrow. Banks need to make the appropriate risk-reward decisions that endure over time. This is being courageous.
We have a long history of succeeding in promoting the long-term wellbeing of all New Zealanders. Our commitment is to clearly communicate our future monetary policy strategies and tools, and when we might use them. We do this so businesses and households can be confident in their decision making. We are well prepared for this challenge.