Australian Economy

Interest rates were too slow to rise

“Likewise, in hindsight, the committee could have raised the OCR [overnight cash rate] earlier.

“The committee was relatively cautious in tightening policy given significant uncertainty around the outlook for inflation, employment and growth.

“This cautious approach was in line with many other central banks over this period.

“Importantly, however, beginning the monetary policy tightening earlier in 2021 would not have fully offset the strong inflationary impulse stemming from Russia’s invasion of Ukraine or the various climate-related supply shocks.”

Reserve Bank of New Zealand governor Adrian Orr, left, and Reserve Bank of Australia governor Philip Lowe. Stuff/AAP

Australia and New Zealand Banking Group chief economist Richard Yetsenga said virtually all central banks, including the Reserve Bank of Australia, should have started raising interest rates sooner than they did.

“There was an under appreciation of how strong the post-pandemic recovery was,” he said.

“The previous low inflation paradigm had become quite entrenched in many people’s thinking.”

The RBNZ raised its overnight cash rate for the first time in seven years, from 0.25 per cent to 0.5 per cent, in October 2021.

The RBNZ had planned to begin raising interest rates earlier in August 2021, but delayed the tightening due to the country plunging back into pandemic lockdowns.

The RBA waited until May 2022 to increase the cash rate from 0.1 per cent to 0.35 per cent, in response to stronger-than-expected inflation.

New Zealand’s cash rate is now 3.5 per cent, above Australia’s cash rate of 2.85 per cent.

Both countries are experiencing inflation of a bit more than 7 per cent.

The findings into the RBNZ was contained in, In Retrospect: Monetary Policy in New Zealand 2017-22, overseen by the RBNZ board.

The RBNZ board’s assessment was reviewed by two external reviewers; Australian National University economist and former RBA board member, Warwick McKibbin, and former Bank of Canada deputy governor Lawrence Schembri.

The RBA is currently undergoing an independent review by Canadian central banker Carolyn Wilkins, ANU economics professor Renee Fry-McKibbin and former senior Treasury official Gordon de Brouwer.

Treasurer Jim Chalmers in July launched a major review of the RBA’s long-standing inflation target, monetary tools, board structure, accountability and culture, amid growing criticisms of the central bank’s interest rate policies.

RBA governor Philip Lowe in 2021 gave forward guidance that the bank believed economic conditions would not warrant an interest rate rise until at least 2024.

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