Monetary Policy Statement August 2020

Monetary Policy Snapshots

Further easing in monetary policy to support the economy

The Reserve Bank will purchase more assets to help lower interest rates. The Official Cash Rate remains at 0.25 percent.

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Economic activity rebounded as restrictions to contain COVID-19 were eased

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Border restrictions continue to suppress the economy

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The Monetary Policy Committee is using its tools to support the economy


The economic outlook is uncertain

The Monetary Policy Committee uses a range of instruments to support full employment and keep inflation stable. The OCR and asset purchases affect interest rates in the economy, including bank lending rates and term deposit rates. Interest rates can be reduced by lowering the OCR or increasing the amount of asset purchases. The seven members of the Monetary Policy Committee have directed the Bank to prepare additional instruments to be available as needed.

Latest key statistics

  • Economic growth: -0.2 percent (March quarter 2020)
  • Inflation: percent: 1.5 percent (June quarter 2020)
  • Unemployment rate: 4.0 percent (June quarter 2020)

Economic activity rebounded as restrictions to contain COVID-19 were eased

  • The spread of COVID-19 in New Zealand was suppressed over June and July, and restrictions were eased. People in New Zealand were able to return to many of their usual everyday activities.

  • Businesses reopened and resumed production. Household spending rebounded, although the Wage Subsidy and savings accumulated during the earlier lockdown helped.

  • Outside of New Zealand, restrictions were also eased in many other economies and economic activity picked up. Whether this recovery persists depends on whether or not COVID-19 can be contained. Financial markets have been more settled since May and our export commodity prices have held up.

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Border restrictions continue to suppress the economy

  • Border restrictions remain in place to keep COVID-19 contained in New Zealand. This significantly impacts industries such as international tourism and education, which together would normally account for a fifth of New Zealand’s exports. Border restrictions also reduce the inflow of migrants, reducing the amount of available workers in New Zealand.

  • Many firms are reducing costs because of the weaker economy. New investment projects are being put on hold or cancelled. Firms are reducing labour costs, initially by reducing wages and hours, but also by laying off workers. As a result, households have less income, which reduces their ability to spend.

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The Monetary Policy Committee is using its tools to support the economy

  • Monetary policy plays a key role in stabilising the economy through the business cycle. The aim is to support full employment and to keep future inflation between 1 and 3 percent.

  • During the COVID-19 pandemic, the Monetary Policy Committee has used a few of its policy tools to reduce interest rates for households and businesses. The Committee decided to reduce the Official Cash Rate (OCR) to an all-time low of 0.25 percent. It also initiated a government bond purchase programme, helping to further reduce interest rates in New Zealand.

  • Monetary policy has complemented other Government initiatives, such as the Wage Subsidy, which have also been important in supporting the economy through the initial impacts of the restrictions to contain COVID-19.


The economic outlook is uncertain

  • The COVID-19 pandemic and the response by the Government to contain its spread have been unprecedented. The COVID-19 pandemic is by no means over. If there is another widespread outbreak in New Zealand, restrictions to contain it would likely hurt the economy. It is also unclear how the pandemic will evolve globally, and whether or when effective vaccines will become widely available.

  • The government and monetary policy actions to support the economy have been significant. A key uncertainty in New Zealand is what happens when the Wage Subsidy ends. At least 460,000 jobs are currently being supported by the Wage Subsidy. Further job losses are likely, but the extent of these is unclear.

  • Uncertainty is making it harder for households and firms to plan, which will cause them to be more cautious in their spending decisions.