An overview of the effects of monetary policy in New Zealand on GDP and inflation, from 1981 to the present day.
% annual growth rate:
Sources: M3 from Reserve Bank of New Zealand database and nominal GDP from IMF database, as at September 2023
The medium-term relationship between money and nominal GDP growth in New Zealand, 1981-2022
Five-year moving averages of annual % changes, with 1983 being the start of the first five-year period
Comment on monetary trends in New Zealand
Although a separate currency from sterling since 1933, the New Zealand pound was aligned with the UK currency on and off until 1967, when sterling devalued and New Zealand introduced its own currency, the dollar, which was initially pegged to the US dollar and did not float freely until 1985. Also at this time, New Zealand's financial markets were liberalised. Up to this point, there had been a number of direct controls on the operations of financial institutions.
The 1980s saw very high levels of broad money growth but also a severe recession, with high levels both of unemployment and inflation. The authorities at the Reserve Bank of New Zealand (the country's central bank) were aware of renewed interest in monetarism elsewhere in the anglophone world, and sought to control the growth in the quantity of money to bring inflation levels down. Regrettably, from the 1990s onwards, less importance has placed on the quantity of money when determining monetary policy. However, the actions taken in the 1980s, along with a programme of privatisation, liberalisation and deregulation, has resulted in the country enjoying a long period of stable broad money growth since the 1990s without the peaks and troughs of earlier years. New Zealand was the first country to introduce 'Inflation Targeting' in 1989, which contributed to the adoption of policies committed to maintaining price stability. The success of the Reserve Bank of New Zealand was later on emulated by other central banks by also adopting an explicit inflation target in the 1990. Inflation has remained at modest levels and only briefly during the Great Depression of 2008-9 has the country experienced a decline in GDP. Indeed, New Zealand recovered far more rapidly from this crisis and stable broad money growth continued throughout the 2010s.
New Zealand’s response to the coronavirus pandemic of 2020 was a very strict lockdown. The country more or less cut itself off from the rest of the world although a reasonable amount of foreign trade continued. Like the central banks in many other developed countries, the Reserve Bank of New Zealand responded to the shutting down of the economy by cutting interest rates and buying assets (i.e., quantitative easing). The monetary stimulus was relatively modest compared to the actions of other leading economics such as the USA, with annualised quarterly M3 growth peaking at just over 14% in the spring of 2020, while the annual growth rate never rose above 12.2%.
Since late 2021, the Official Cash Rate has been raised by 525bps. The central bank also started to reduce its balance sheet at the end of February 2022 by both selling and running off the assets it had purchased in 2020-21 to boost the money supply during the pandemic (i.e., quantitative tightening).
The increase in broad money in 2020 resulted in inflation rising in late 2021 and 2022. Consumer prices rose at an annual rate of 7.3% in the third quarter of 2022 and remained well above the 2% target in 2023.