Government Launches Surprise Review of Reserve Bank’s Covid-19 Response
The New Zealand government is set to conduct a comprehensive review of the Reserve Bank’s actions during the Covid-19 pandemic, a move that has drawn sharp criticism from opposition parties who deem it politically motivated. The review, slated for release in September, is happening just months before a general election, fuelling accusations of a politically timed “hit-job.” However, ministers within the coalition government have vehemently denied any ulterior motives, insisting the review is purely about learning from past economic decisions.
The central focus of this review will be the Reserve Bank’s unprecedented monetary policy interventions. These include:
- The dramatic reduction of the official cash rate (OCR) to a historic low of 0.25 percent. This was a key tool used to stimulate borrowing and spending during a period of economic uncertainty.
- The implementation of quantitative easing, often referred to as “money printing.” This involved the Reserve Bank purchasing government bonds and other assets to inject liquidity into the financial system.
Furthermore, the review will scrutinise the coordination between monetary policy (actions taken by the Reserve Bank) and fiscal policy (government spending and taxation). The aim is to understand how these two policy arms interacted and whether their combined effects were optimal.
Finance Minister Nicola Willis stated that the review’s primary objective is to identify crucial lessons learned, particularly in light of the subsequent surge in inflation and the dramatic rise in house prices. “The Reserve Bank of New Zealand took unprecedented action in response to the Covid-19 pandemic,” Willis explained. “These actions helped to preserve jobs and keep businesses afloat, but the indirect impacts included decades-high inflation, and losses of about $10.3 billion on the LSAP [Large Scale Asset Purchase] programme and a significant spike in asset values with house prices increasing 30 per cent in one year.”
Reserve Bank’s Perspective and Criticisms
Despite the government’s stated aims, the Reserve Bank’s chief economist, Paul Conway, previously defended the Large Scale Asset Purchase (LSAP) programme, commonly known as “money printing.” Speaking at an investment conference in Sydney, Conway argued that the LSAP scheme had largely “paid for itself” and played a vital role in maintaining economic stability during the stressful pandemic period. He posited that by stimulating economic activity, the LSAPs boosted government tax revenues, which in turn almost entirely offset the direct financial losses incurred by the programme. This, he claimed, left consolidated Crown debt virtually unchanged in the medium term.
However, the LSAP programme, along with a related $19 billion facility offering cheap loans to banks, has faced significant criticism from various commentators who have questioned its cost and overall effectiveness.
Reserve Bank Welcomes Review, Opposition Cries Foul
The new Governor of the Reserve Bank, Dr. Anna Breman, has expressed a welcoming stance towards the government’s review. In a statement, she indicated that the institution is “open to learning from its past actions” and looks forward to the insights the review will provide. Dr. Breman highlighted an existing internal Reserve Bank review that concluded the money printing programme was “successful in correcting financial market dysfunction and reducing long-term interest rates.” She also noted that these findings had undergone peer review by international experts.
However, she also acknowledged a key finding from that same review: “in hindsight, earlier, or stronger monetary tightening could have curbed the subsequent hike in inflation.” Dr. Breman, who began her five-year term as Governor in December of the previous year, was appointed following the early departure of Adrian Orr.
The timing of the government’s announcement has been a major point of contention for opposition parties. Labour leader Chris Hipkins labelled the move as a sign of desperation from the coalition government, attempting to reignite “Covid-19 conspiracy theorists.” He accused Nicola Willis of “cynical political manipulation,” arguing that if she were genuinely interested in the Reserve Bank’s pandemic response, the inquiry should have been launched immediately upon her becoming Finance Minister, not during an election campaign.
Green Party co-leader Chlöe Swarbrick echoed these sentiments, describing the timing as “real sus” and suggesting “quite dodgy motivations” behind the government’s actions. She stated that the inquiry “could have and should have” been initiated much earlier in their term to allow for a “meaningful and informed public debate.”
Government Defends Review Timing and Purpose
Minister of Finance Nicola Willis has refuted claims that the review is politically motivated, maintaining it is a straightforward exercise in “learning the lessons of history.” She posed a rhetorical question: “If it is the case that the Reserve Bank’s actions, overseen by the last government, led to financial harm to New Zealanders, should I hide that information from New Zealanders? Absolutely not. If they made mistakes, New Zealanders deserve to know.”
When pressed on why the review wasn’t initiated earlier, Willis cited a substantial “work agenda” she had with the Reserve Bank during her term, which included governance reforms. She expressed confidence in the current timing, noting the appointment of a new Governor, a refreshed board, and a revamped monetary policy committee, all of whom she described as “open to examining these questions.”
Prime Minister Christopher Luxon supported the review, deeming it “quite right” to closely examine the Reserve Bank’s “excessive printing of cash.” He emphasised that New Zealand “cannot go through the experience it went through where economic chaos and carnage was caused and actually not ask some questions.”
Deputy Prime Minister and ACT leader David Seymour also endorsed the review, calling it “absolutely the right thing to do.” He stated, “During Covid, the Reserve Bank lost its mind and we’re still paying for it. They were printing money to prop up the government’s Covid response.” Seymour added, “Not everyone believes me, so maybe it’s worth having a few other people point out that if you abandon sensible economics in a crisis you end up poorer.”
James Ross, a spokesperson for the Taxpayers’ Union, described the review as “long overdue” and advocated for it to possess the full legal powers of a government inquiry. He stressed, “This cannot be a once-over-lightly desktop exercise. It must be a forensic examination that produces a practical blueprint to prevent a repeat of this economic disaster. The public deserve nothing less.”
To conduct this independent review, the government has appointed two distinguished monetary policy experts: Athanasios Orphanides and David Archer. Orphanides is a former governor of the Central Bank of Cyprus and a former member of the Governing Council of the European Central Bank. Archer is a former assistant governor of the Reserve Bank of New Zealand and previously headed the Central Banking Studies Unit at the Bank for International Settlements.
