Bulletin article discusses unconventional monetary policy since the Global Financial Crisis
An article published today in the Reserve Bank Bulletin examines the international experience of several central banks
since the global financial crisis of 2007/08, and considers the potential for such policies in the New Zealand
Many of the world’s major central banks cut policy interest rates to zero during the crisis. However, these economies
still needed further stimulus to meet the objectives of monetary policy. As a result, some central banks introduced what
were termed “unconventional” monetary policies to further ease financial conditions and provide additional stimulus for
output and inflation. These policies included negative policy interest rates, large-scale asset purchases, and targeted
term lending to the banking sector.
Overall, these policies were successful in easing financial conditions, and emerging research suggests they boosted
inflation and activity. However, they were not without potential costs. Central banks have successfully managed
additional balance sheet risks, potential financial stability risks and the possibility for adverse impacts on financial
Currently, monetary policy settings are stimulatory in New Zealand, and the Bank is not projecting a significant
decrease in the OCR. With the OCR at 1.75 percent, the Bank has significant further room to ease monetary policy in a
conventional way, and conventional monetary policy remains effective in influencing inflation and activity. However, it
is prudent to learn from other countries’ experiences with unconventional monetary policy and examine how such polices
might work in New Zealand if the need arises.
The authors, Sarah Drought, Roger Perry, and Adam Richardson, find that there is qualified potential for such policies
in New Zealand. Interest rates could likely be lowered into modestly negative territory, and targeted term lending
facilities could be introduced. Asset purchases would also be effective. However, the structure and size of New
Zealand’s financial markets could limit the overall scope of such a programme. In addition, the exchange rate is likely
to play a more important role in easing financial conditions than was seen in the United States and the euro area.