New Zealand's central bank waited too long to tweak monetary policy after its initial response to the Covid-19 pandemic resulted in a stronger-than-expected economic recovery, causing the economy to overheat to a historically extreme degree, according to an independent review published by the Finance Ministry on Tuesday.
The review examined how the central bank dealt with the pandemic shock, finding that its initial response was praiseworthy with the early adoption of a least-regrets strategy and the fast rollout of large-scale asset purchases.
However, amid prevailing uncertainty at the time and concerns over downside risks, "it took a full year for policy to adjust to the reality that the initial economic stimulus had already achieved the intended result," the review said.
While policymakers stopped introducing stimulus as inflation surged past target, they lacked sufficient urgency in doing so, with an expansion of large-scale asset purchases beyond what was needed contributing to excess demand.
The review issues several recommendations, including that the central bank should develop a monetary policy strategy that addresses known vulnerabilities and is more robust to uncertainty. It also urged for a greater emphasis on real interest rates, near-term inflation signals, and scenario analysis.
Responding to the review, the Reserve Bank of New Zealand said it welcomes the findings and will use them to help inform future practice.