The Governor of the Reserve Bank of New Zealand explains how the expansion of money supply and higher consumer prices have eroded people’s purchasing power. Video / Carson Bluck / Mark Mitchell
New Zealanders’ purchasing power has declined 19.4 per cent since March 2018 when Adrian Orr became the Governor of the Reserve Bank of New Zealand, according to its inflation calculator - a situation he describes as “terrible”.
“That is bad. Inflation is evil, our task is to get it tobe low and stable,” Orr told Markets with Madison.
“No one is excited or proud that inflation has been outside of the target.”
The consumer price index, the RBNZ’s measure of inflation, rose by 4.7 per cent in the year to the December quarter. It has sat outside the RBNZ’s target range of between 1 and 3 per cent for three consecutive years.
The RBNZ projected the index would be back within that range in the second half of this year, at which stage Orr said he hoped to reduce interest rates.
“You will see a very happy central bank Governor.”
To engineer a deliberate downturn, the RBNZ increased the official cash rate (the wholesale interest rate banks pay to borrow money) from a record low 0.25 per cent to 5.5 per cent, and had kept it at that height since May last year.
Governor of the Reserve Bank of New Zealand Adrian Orr in the room where the Monetary Policy Committee decides how to control inflation.
Money printing
Today’s expensive reality was the result of “economic chaos” that ensued during the pandemic globally, Orr explained.
“[Covid-19] will be marked down as one of the most historically important impacts on human welfare in the last 100 years.”
He defined inflation as consumer price increases, that came from a combined “vicious cycle” of demand exceeding supply and the expansion of money supply.
The latter was something the Reserve Bank itself implemented during the pandemic - an additional monetary policy measure called quantitative easing.
On a tour of the room where that was decided, Orr explained how it printed money over that period - it was done digitally and through its bond-buying programme where Treasury issued Government bonds, for financial institutions to buy, which the RBNZ later purchased on the secondary market; a means of flushing banks with cash and keeping pressure on real interest rates.
Alongside its record low interest rates, a funding for lending programme for banks and Government fiscal stimulus policies, it pushed New Zealand’s money supply to a record in December 2021.
“Central banks globally, including us, and fiscal authorities, pumped money in to [the economy to] keep jobs and livelihoods going,” Orr told Markets with Madison.
“We played the cards we had in front of us at the time and that led to demand holding up, holding up stronger than expected actually.”
The Governor went viral online in February for a comment he made publicly about printing money at a Finance and Expenditure Select Committee hearing: “It’s a great business to be in central banking, print money and people believe it”.
Clarifying the comment in this interview, he said: “I said people believe it because it is a fiat currency, it is backed by current and all future taxpayers of New Zealand with a Crown balance sheet.
“We print a number on a piece of plastic which is an I-owe-you that people trust because of what’s behind it.”
In this extended interview above, Orr discusses the trust-based central banking system and whether it is working as intended.
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Madison Reidy is the host of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.
