Latest / Early Edition with Ryan Bridge / Mark Smith: ASB Senior Economist on the findings of the review of the Reserve Bank's monetary policy during Covid

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Mark Smith: ASB Senior Economist on the findings of the review of the Reserve Bank's monetary policy during Covid · Early Edition with Ryan Bridge

• 0:00
  Speaker 1: So we've had the independent review now into the Reserve
• 0:02
  Speaker 1: Bank under Adrian Orr. How did it do with COVID?
• 0:04
  Speaker 1: How would it deal with the post-COVID era? No one's surprised.
• 0:08
  Speaker 1: It says the bank was too slow to withdraw the
• 0:11
  Speaker 1: monetary stimulus as the economy recovered. In other words.
• 0:15
  Speaker 1: They over-egged the omelette.
• 0:16
  Speaker 2: They left interest rates too low for too long.
• 0:18
  Speaker 1: The economy overheated to an historically extreme degree. Mark Smith,
• 0:23
  Speaker 1: ASB Senior Economist with us this morning. Mark, good morning.
• 0:26
  Speaker 2: Good morning, Ryan.
• 0:27
  Speaker 1: I mean, is this 2020 hindsight all very well to
• 0:30
  Speaker 1: look back now, but at the time it was hard
• 0:32
  Speaker 1: to see, or should they have seen?
• 0:33
  Speaker 2: A bit of both, really. Hindsight's always a great thing.
• 0:38
  Speaker 2: I suppose for them, you know, it was really the
• 0:41
  Speaker 2: least regrets. You know, what did we want to avoid?
• 0:44
  Speaker 2: And it was a pronounced period of deflation, so they
• 0:47
  Speaker 2: went the other way. Unfortunately, the global economy and the
• 0:52
  Speaker 2: New Zealand economy as well proved to be more resilient
• 0:54
  Speaker 2: and adaptable than initially thought. The amount of stimulus was
• 0:59
  Speaker 2: put in place not only by the Reserve Bank, but
• 1:01
  Speaker 2: also the Treasury as well was absolutely massive. And also
• 1:08
  Speaker 2: the supply side of the economy was also going the
• 1:11
  Speaker 2: wrong way. So the labour market, for example, was the
• 1:14
  Speaker 2: tightest in the generations. So they came out with an
• 1:17
  Speaker 2: economy that was actually more resilient, and also there was
• 1:21
  Speaker 2: not as much spare capacity as earlier thought, and as
• 1:24
  Speaker 2: a result, inflation picked up and stayed higher for longer.
• 1:27
  Speaker 1: Mark, what about the dual mandate? What is your takeaway
• 1:30
  Speaker 1: from this report?
• 1:32
  Speaker 2: Yeah, I mean, that's all very well. Dual mandates are great.
• 1:35
  Speaker 2: The reality is you really only have one instrument, that's
• 1:38
  Speaker 2: the OCR, and if you have two targets, that can
• 1:41
  Speaker 2: be fine if they're both going the same way. What
• 1:44
  Speaker 2: we're seeing now, though, is the global economy is a
• 1:46
  Speaker 2: lot more different. There are a lot more cost shocks.
• 1:49
  Speaker 2: When a cost shock hits an economy, what happens is
• 1:52
  Speaker 2: the unemployment rate goes up and so does the inflation rate.
• 1:56
  Speaker 2: So really the dilemma is which one do you tackle first? Now,
• 1:59
  Speaker 2: the argument here is really the inflation targets to really
• 2:03
  Speaker 2: take precedence. And you really want to also look at
• 2:06
  Speaker 2: real interest rates as well. So as a result, during COVID,
• 2:09
  Speaker 2: the real interest rates were very, very, very low. At
• 2:12
  Speaker 2: the moment, Brentlands' rates in New Zealand are negative.
• 2:15
  Speaker 1: Mark Smith, good to have you on the show as always.
• 2:17
  Speaker 1: ASB Senior Economist. For more from Early Edition with Ryan Bridge,
• 2:22
  Speaker 1: listen live to Newstalk ZB from 5am weekdays or follow
• 2:26
  Speaker 1: the podcast on iHeartRadio.