The Reserve Bank has been forced to adjust its approach to setting monetary policy in a post-Covid era, a Reserve Bank Monetary Policy Committee member says. Photo: RNZ
Generic money. Photo: RNZ / Rebekah Parsons-King
Global shocks and cautious consumers are making monetary policy's job harder than ever.
Speaking to an economist conference in Melbourne, Reserve Bank Monetary Policy Committee member, Prasanna Gai, likened the setting of monetary policy in the post-Covid era to batting on a "sticky" cricket wicket, where the ball swings and bounces unpredictably.
He said it has forced the Reserve Bank to adjust its approach to setting monetary policy, veering between rapidly increasing interest rates when inflation surged post-pandemic, to being cautious in cutting rates as inflation and inflation expectations remained stubbornly high.
Gai said that US tariffs had changed the game again, blunting the impact of the Reserve Bank's rate cuts.
"For a small open economy like New Zealand, the US tariffs have acted as a negative demand shock," he said.
Gai noted how households stopped spending and businesses stopped investing, but would not drop prices to lift demand, creating an "uncertainty trap", where everyone hesitated, growth stalled and jobs and wages came under pressure.
Lowering interest rates slowly in this scenario did not break the stand-off and required more aggressive action by the Reserve Bank to get the economy moving.
Gai noted that central bank communication became a vital tool in unlocking the stand-off between businesses and consumers.
"Transparency reduces fundamental ambiguities by clarifying the macro-landscape, while forward guidance about the future policy path reduces strategic ambiguity by aligning expectations across firms and households," he said.
Gai finished his remarks with his cricket theme and the Australian batsman Victor Trumper, who thrived on sticky cricket wickets, urging central bankers to bat decisively when setting monetary policy, and clearly communicating their future intentions.
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