Navigating Monetary Policy Through The Unknown: A Speech By RBNZ Governor Adrian Orr

Low and stable inflation is again in sight, as we navigate monetary policy. In New Zealand, consumer price inflation is now at 2.2%, converging on the midpoint of our 1 to 3% target range, Governor Adrian Orr says.

“That’s something to celebrate,” he says in a speech delivered at the Peterson Institute in Washington DC, while attending the IMF and World Bank Annual Meetings, where policymakers are discussing monetary policy.

“Navigating monetary policy, with a 1 to 2-year lag between policy action and ultimate outcome, is akin to ocean circumnavigation,” Mr Orr says.

“When setting monetary policy, we have a clear – unmovable – destination in mind. However, we only have a reasonable sense of where we are currently located, and only partial knowledge of the sturdiness of the economy and the effectiveness of policy instruments.

“We must also be cognisant of unanticipated risks ahead, and at times act swiftly to avoid perils. First, stay afloat. For monetary policy makers, peril includes a long and persistent downturn, with monetary policy stuck at the effective lower bound, or an inflationary spiral. Over recent years, global monetary policy navigators have had to act fast to avoid both perils.”

“It is now pleasing to be able to ease monetary policy in New Zealand, but it’s still at a level we think is restrictive, so as to work against any remaining inflationary tendencies that may linger.”

A key question now is how long it will take for any lingering inflationary pressures to dissipate? “The sooner this happens, the sooner we will be able to claim that the inflation caused by COVID-19 – amongst other severe shocks — is behind us.”

“We are in a situation where we can provide the perspective of an economy returning to low and stable inflation, interest rates becoming less restrictive, and economic activity being revitalised. But that is just the most recent navigational plot on the ocean chart,” he says.

More information

Watch the livestream on the PIIE YouTube channel

Download the speech (PDF, 1MB)

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