Official Cash Rate to remain restrictive

The Monetary Policy Committee today agreed to keep the Official Cash Rate at 5.50 percent.

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Have the effects of monetary policy on inflation and economic activity in New Zealand changed over time?

Jamie Culling, Punnoose Jacob, Adam Richardson, Evelyn Truong, Tugrul Vehbi

How effective is monetary policy in the aftermath of the Global Financial Crisis (GFC), in a world of persistently low interest rates? Our results show that conventional monetary policy is still as effective as before the crisis.

We use three different models to evaluate monetary policy transmission. These models show that a 25 basis point cut in the Official Cash Rate (OCR) leads to an increase in inflation and GDP growth, and that this response is as big today as it was before the GFC. This implies that the recent OCR cuts by the Reserve Bank will lead to – all else equal – higher inflation and GDP growth, and help support maximum sustainable employment (MSE).