RBNZ's Adrian Orr acknowledges bank's role in high inflation rate

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

Reserve Bank Governor Adrian Orr has acknowledged that monetary policy has played a part in the country's very high inflation rate.

Orr said a report from former governor Graeme Wheeler and Bryce Wilkinson, a senior fellow at The New Zealand Initiative, would be considered as part of a review.

Wheeler and Wilkinson said central banks had made serious errors in the wake of the Covid-19 pandemic which now need to be acknowledged and corrected.

The pair were highly critical of the loose monetary policy and quantitative easing that occurred and which they argue has been the primary driver of inflation.

Orr, in a statement, said: "As governor of the Reserve Bank and chair of the monetary policy committee, I acknowledge that consumer price inflation is at 7.3 per cent, above the remit target range of 1-3 per cent.

"I also acknowledge that the Monetary Policy Committee's decisions over recent years have influenced this outcome.

"This acknowledgement is reflected in our regular monetary policy statements and through our ongoing efforts to quell excess demand in the economy," he said.

Orr went on to say that "inflation is no one's friend and causes economic cost".

The Reserve Bank is in the midst of its first-ever five-yearly review of its remit.

Orr said the bank has encouraged public participation in the remit review process and sought independent international expert advice.

In addition to the remit review, the bank was also reviewing its recent performance in conducting monetary policy, including the use of additional monetary policy tools.

"This monetary policy review will assess inflation and employment outcomes relative to the targets outlined in the remit, and the decisions taken at various times based on the information available at the time, relative to other central banks, and relative to likely alternative economic outcomes if these decisions had not been taken."

The decisions of the monetary policy committee were always made with the information at hand at the time, he said.

"This information and the assumptions made at each decision point are outlined for all to view in our monetary policy statements."

Wheeler and Wilkinson's report argued that the bank faced conflicting "dual mandate" objectives regarding both inflation and employment.

They also called out the bank for its work in integrating a Māori world view into its outlook and diverting resources to other topics such as climate change and inequality.

Orr countered: "I can state that issues related to climate change, Te Ao Māori, and financial inclusion, do not distract the monetary policy committee from their task at hand.

"These issues do, however, influence the stability, efficiency, and inclusion of New Zealand's financial system.

"They remain highly relevant to the Reserve Bank in achieving our legislative purpose of increasing economic prosperity and wellbeing for all New Zealanders."

Orr said he regretted that the committee – and society at large – had been confronted with the Covid-19 pandemic, and other recent events that have caused food and energy price spikes.

"We are a learning institution, and through the open process of the remit review and the monetary policy review, we will be very clear on our lessons learnt as we forever seek to do a world-class job for the people of New Zealand," he concluded.

The Reserve Bank's response to Covid-19 involved taking its official cash rate down to just one quarter of a percentage point and pumping $54 billion into the bond market - a process known as quantitative easing.

Meanwhile, the leader of the opposition Christopher Luxon called for a public inquiry.

"A public inquiry should examine the extent to which a tidal wave of cash poured on the New Zealand economy caused the current cost of living crisis," he said.

"The Reserve Bank and the Government took unprecedented steps in 2020 and 2021 to pump money into the financial system," Luxon said.

"The massive and ongoing monetary and fiscal response unleashed a tidal wave of cash into New Zealand's economy," he said.