Monetary Policy Challenges for a Small Open Economy during COVID-19

The Reserve Bank of New Zealand in responding to the COVID-19 crisis was well served by its legislative mandate and operational independence, said Reserve Bank Governor Adrian Orr, when delivering the Sir Leslie Melville Lecture, organised by The Australian National University in Canberra.

In his speech Mr Orr discussed how the Reserve Bank’s monetary and financial policy decisions supported the economy during the economic shock from COVID-19.

“The Bank was able to act swiftly and with confidence, as a team we could focus on our mandate of low and stable consumer price inflation, contributing to maximum sustainable employment, and promoting financial soundness. We are confident our work has been welfare enhancing.”

In the speech Mr Orr outlined how the pandemic arrived during a period of low nominal interest rates globally. With official interest rates near an effective lower bound in many countries, including New Zealand, new monetary policy tools were both developed and put to work effectively. These monetary policy tools are now internationally mainstream.

Mr Orr went on to outline that while central banks now have additional tools at their disposal, they do not have additional targets. Globally, consumer price inflation and employment remain the mainstay targets for monetary policy.

The impact of monetary policy decisions on wealth and income equality is another important topic discussed in the speech. Mr Orr noted, “There will always be trade-offs when implementing monetary policy, and that these must be identified and managed appropriately, and with the right tools.”

Finally, he stressed the importance of fiscal policy and monetary policy working hand-in-hand.

“Fiscal-monetary coordination will remain important, now and in the future. In New Zealand institutional relationships are strong, resulting in a strong complementarity in fiscal and monetary actions,” Mr Orr said.

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