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Review and Assessment of the Formulation and Implementation of Monetary Policy (RAFIMP)

RAFIMP is a review of how we have made decisions about monetary policy in the past 5 years and how those decisions were brought into effect.

Past Event
Thursday, 10 November 2022 to Thursday, 10 November 2022
9:00 am - 2:00 pm

Watch the technical briefing for the review and assessment of monetary policy (RAFIMP).


  • Professor Neil Quigley Chair of the Reserve Bank Board
  • Governor Adrian Orr
  • Chief Economist Paul Conway

Neil Quigley: Ra rangatira mā, tēnā koutou i tenei ahiahi tenei te mihi kia koutou katoa.

Welcome everyone. It's my pleasure to be here this afternoon to welcome you to this technical briefing on the review and assessment of the formulation and implementation of monetary policy. Welcome to those in the room and those who are watching on the livestream. My name is Neil Quigley. I'm the chair of the board of The Reserve Bank of New Zealand. 

The board has for many years undertaken reviews of the bank's monetary policy statements both at the time of the release of each statement and annually in preparation for our annual report. This review and assessment of the implementation and formulation of monetary policy (RAFIMP) as we refer to it, continues our tradition of analysis and self-reflection while providing the benefit of a longer Horizon for the frame of analysis. The report's been compiled by The Reserve Bank staff with input from external reviewers members of the Monetary Policy Committee and also the Board of Directors. 

The review provides the bank's assessment of its conduct of monetary policy and in addition it provides a comprehensive range of information that will allow those who read it to form their own views about the events and the effectiveness of monetary policy.

The board very much supports the approach that's taken in the report and in particular its explanation both of the macroeconomic context of policy immediately before and during the pandemic and the reasons why decisions were taken at each point in time. Since monetary policy works with a long and variable lag and since the Reserve Bank doesn't operate with perfect foresight, the report also makes appropriate use of hindsight in assessing the decisions that were taken and in identifying some shortcomings and policy from the perspective that we have today.

I'd like to especially mention the 2 international experts who provided independent reviews of the report — Lawrence Schembri  — a former deputy governor of the Bank of Canada and Professor Warwick McKibbin — a distinguished professor and director of the ANU Center for Applied Macroeconomic Analysis at the Australian National University. They provided valuable feedback which contributed to a significant improvement in the quality of the report as well as providing a summary of their views when the final version of the report was prepared.

Just to highlight some of the comments that our external reviewers have made — Lawrence Schembri says that he considers the report a thorough and thoughtful assessment of the formulation and implementation of monetary policy by The Reserve Bank. He says that the Reserve Bank's conduct of monetary policy was nimble and forward-looking and largely consistent with its objectives. Lawrence Schembri also says the report owns up to shortcomings identified and offers a set of useful lessons learned and constructive recommendations that will help strengthen the future conduct of monetary policy in New Zealand.

Similarly, Professor Warwick McKibbin says the review is clear and a well written overview of the experience of the New Zealand economy and the role of the Reserve Bank's monetary policy in the economy from 2017 to 2022. Professor McKibbin’s conclusion is that the Reserve Bank responded better to the covert crisis and the ongoing shocks in the global economy than many other central banks and he notes that he agrees with the list of lessons learned and the overall conclusions.

So we'd like to thank those reviewers for their engagement with the development of the report and providing those final comments.

The Reserve Bank Board and all of the Senior Leadership Team look forward to the informed feedback and commentary that we will no doubt get as a result of this report, and that's an important part of the role of the report is to provide a basis on which people can provide that feedback to us.

So finally from me — on a personal note I'd like to congratulate Adrian on his reappointment as Governor of the Bank, a decision just announced by the Minister of Finance in the last few days as you'll realize and I'm delighted to be able to acknowledge the many important work streams that have advanced as Adrian has taken over the leadership of The Reserve Bank of New Zealand so now Adrian, can I pass over to you for a few comments.

Thank you.

Adrian Orr:  Thank you and tēnā koutou katoa. Kia orana tatou katoa. 

Thank you Neil. I do say I am very proud to be here today sharing and discussing this review of monetary policy. It's a significant document and I know there's a lot to absorb for everyone. 

As Neil mentioned, you're aware of my reappointment — a decision announced by the Minister of Finance and I just want to say I'm incredibly thankful for the Board's ongoing support and how proud and humbled I am to have another 5-year term guiding the work here at Te Pūtea Matua. So I very much look forward to it. I have to say the last 5 years have been incredibly challenging for us all, or particularly, you know for the whole team here at Te Pūtea Matua, and for society at large it has been in some ways incredibly supporting as well in terms of what we've achieved and learned and the opportunity to serve another 5 years is a great privilege for me.

The 2017 to 2022 period is the period of the review and that's what we're here to talk about today. As such it does cover a considerable amount of time during my leadership as Governor and the previous Governor as well, so there's an overlapping period. It’s a period that has been uniquely challenging. The economy has been responding to initially globalization and more recently, fragmentation across markets, significant technological change, declining global interest rates which we emphasize in the document and then of course the COVID-19 pandemic and more recent Russia invasion of Ukraine.

Throughout this, the review finds that monetary policy decisions were consistent with the data available at the time. It's a very incredibly difficult task to bring people back into the real time, the data available and the decisions being made  — in particular the easing of monetary policy during the COVID-19 pandemic was warranted and did hit off the worst case economic scenarios that were confronting us at that time.  

Again I'd emphasize how difficult it is, perhaps in a good way to remember just how dark times were back in early 2020 when some of the most large decisions were made. Of course, there is much for us to learn. We are a learning institution and the nature of this document is about identifying the lessons and progressing to do our role better and better through time.

There are 9 specific areas or 9 areas brought out. They are quite general — they are all on our radar and being progressed and I would add that many of them are not unique to Te Pūtea Matua, lot of the global monetary policy lessons. We are a learning institution. We are working very rapidly to take on board the lessons and I also want to congratulate and thank in particular the external experts who really gave us a thorough run through.

I want to just say thank you very much to our dedicated team here at Te Pūtea Matua. Sitting behind this is missing the colour and reality of a lot of the time and work many of these instruments and decisions made were being made from households throughout Aotearoa as we worked remotely during the pandemic, like everyone else. I am confident that with every difficult decision, every piece of complex analysis and every emerging issue was managed with the absolute and total focus of our staff towards assisting the economy of Aotearoa New Zealand. So thank you very very much for that dedication. 

This report gives us some very strong insights and I truly welcome it. I've been looking forward to this day, to be able to talk more thoroughly and openly about recent history and it's about holding ourselves to account and doing so publicly and as the Chair mentioned, this comes from a long history here at the Reserve Bank of New Zealand of openly providing open analysis.

So now I'd like to hand over to our chief Economist Paul Conway who has been one of the lead pen holders in this document. He'll take you through a few of the pieces of the analysis and then we can throw it open to questions Meitaki ma'ata. Kia ora Paul.

Paul Conway: Kia ora, Governor. Tēnā koutou katoa, nau mai haere mai. Welcome from me to Te Pūtea Matua. Thanks for coming along.

As the Governor mentioned, I'm also very pleased to be able to release this report today. As Adrian spoke about the last 5 years have been uniquely challenging so there's much for us to learn from the conduct of monetary policy over these years, both here in New Zealand and internationally. I've certainly learned a lot working on this report along with colleagues in the economics department and in the financial markets department here at the Reserve Bank. The report is comprehensive — you would have already seen it, it weighs in over 100 pages. That's very thorough and it's honest and accurate and these are sentiments that are echoed by our international reviewers and other people that have seen earlier drafts of this report. Again, as you would have seen, the report is split into 3 sections. So the first provides some context, so it outlines changes in the monetary policy framework that have occurred over the review period over the last 5 years and it also briefly outlines what was is happening in the economy coming into that review period. 

The second section of the review looks at monetary policy in real time, so there's a real focus in that bit of the report on the data that was available to monetary policy makers at the time that they were making that decision so it sort of you know really reflects the health and economic emergency that we were living through over during part of the review period. It highlights you know that we were in a very fast moving environment at that time. As Adrian mentioned it's not just about the pandemic — it's about what was happening with global neutral interest rates, it was about globalization among other things you know climate related issues. It was quite an intense period for monetary policy makers to be doing their work. 

Of course, the review, it draws on a number of lessons from that sort of real-time analysis of monetary policy. The Governor's already mentioned some of them — they're dotted throughout the report and they're summarized in the executive summary. They include the
fact that monetary and fiscal policy actions are taken at the onset of the pandemic meant that worst case economic scenarios were avoided. There’s also lessons in there around the importance of understanding the economic impacts of new fiscal policy tools that were developed to mitigate the economic fallout of the pandemic, also the fact that monetary policy again as the governors mentioned could have been tightened earlier in 2021. I'll come back to that in a minute. 

Then in the third section of the report, it steps back and it looks at the conduct of monetary policy with the judicious use of hindsight over the 5-year period as a whole and essentially the objective of that section is to assess whether monetary policy decisions were made in a way that's consistent with the Remit and with the objectives of monetary policy prior to the time when we had the Remit — this includes an initial assessment of the effects of additional monetary policy tools and I say initial because that story of AMP tools has still got a long way to run and will be the subject of much scholarly attention for decades to come.

Again, we draw a number of lessons from this review of policy in hindsight —  for example we talk about the effectiveness of AMP tools in correcting dysfunction in the financial system and providing additional monetary policy stimulus. We talk about the fact that the inflation objectives and the maximum sustainable employment supporting MSC objective of the monetary policy committee have not been in conflict over the past 5 years. We talk about the importance of clear and credible communications out of this institution among many others. Now of course lessons learned are only useful to the point that they lead to future improvements in monetary policy making.

So to that effect and again as the Governor mentioned, we highlight 9 specific areas for improvement based on the experience of the last 5 years and in the interest of time really keen to get into the Q and A. I'm not going to list them but you'll find them right up front in the executive summary of the report.  Now before I finish, I'd just like to go back to the lessons learned that with the benefit of hindsight monetary policy could have been tightened earlier in 2021 and I want to make the point that even if the Monetary Policy Committee had tightened policy earlier in 2021, we would still have inflation above target now would have most likely just been marginally below where it is currently in fact. To sort of highlight what I mean by that — to have inflation within the target band, now the Monetary Policy Committee would have had to have perfect foresight of the whole series of supply shocks that have rolled through the global economy these past few years — including of course the Russian invasion of Ukraine and they would have had to increase the OCR to almost 7%. A couple of years back when New Zealand was in the thick of a global pandemic with all of the economic turmoil that would have been unleashed by such an unrealistic decision, so this is clearly an implausible scenario and it would also have been inconsistent with the Remit of the Monetary Policy Committee had it even been possible which it obviously wasn't. So the point I want to make is, we are a
flexible inflation targeting central bank. That means that inflation will not always be in the target band, even in normal times and the last few years have most definitely not been normal times. 

So for me, perhaps one of the greatest lessons from this review is around what monetary policy can and can't achieve and also the importance of having strong institutions — how important that is for us here in Aotearoa in terms of delivering great economic outcomes for all New Zealanders.

I'm going to leave it at that. Really looking forward to the Q and A. Thank you.

Adrian Orr:  And just before we whip to Q and A, so for those who haven't noticed, we have 1, 2, 3, 4, 5 of the 7 Monetary Policy Committee team here. Peter thank you for making the effort and you the team know Christian and Karen as well thank you.

Media questions

Media: National’s finance spokesperson Nicola Willis has said this report fails the credibility test because it's not independent. What's your response?

Neil Quigley:  Well I think that there's an important role for the Bank to undertake its own assessment of the policy track of the past. So we've provided enough information that other people will be able to form their views independently if they wish, and I think the credibility of the 2 external reviewers stands without any really additional comment. They are terrific people, well known internationally in their field and so their full reports will be available to all of you on our website.

Media: Just a further question — I mean one of those reviewers, Warwick McKibbin described the spending of over $50 billion on quantitative easing is excessive which seems a stronger criticism than the Bank makes in its own sort of authored report. I didn't see that sort of reflected in the same way in the final report. Is that statement fair do you think?

Adrian Orr:
  It's a statement of Warwick McKibbin so we take that as his opinion.

Media: Just in reference to fiscal policy — is it fair to say then that the Bank underestimated the impact of the fiscal impulse particularly the wage subsidy?

Adrian Orr: I can answer that. Part of why we are saying we could have tightened slightly earlier was because of the effectiveness of the overall monetary and fiscal policy stimulus and without doubt, the fiscal policy stimulus was highly effective, broad-based and well taken up. Our challenge is before I finish either leads and the lags as you well know, we set monetary policy with a 1 to 2 year view ahead. We were aware of the tools as were being built and implemented but policy was underway at that point so this is the forever challenge. One of the lessons that is drawn out and agreed to by our experts is if these fiscal policy tools are going to be remain as potential use then we need to have a much better understanding around when they'd be used, how they're being used, so that we can make a better assessment around their effectiveness. It's always good to know in advance as well. So you know, it was globally a unique fiscal policy response

  On the least regrets approach then I mean and obviously you're looking back in hindsight and say you could have done this or could have done that, but has this report given you pause to think about the least regrets approach which kind of seems to be an all or nothing if you like?

Adrian Orr: Yeah I tell you what, it's given me most pause about trying to re-explain the same thing over and over again to people. Least regrets is one phrase within which several different actions were taken. The first period of least regrets was to ease substantially. The second period of least regrets was to not tighten too soon and the last period of least regrets was to not do too little too late so there were very 3 very different sets of monetary policy operations under one phrase. I have to say it's been popularized though by the way you keep describing it there Brett. It's very very different so there wasn't a personal thing I bring it away it keeps being described externally.

Kia ora. Annika Smith from Radio New Zealand here. The chair of the Federal Reserve Jerome Powell recently spoke and said that he was potentially rethinking the lag in terms of what central banks have predicted in the past and it's become more variable. You mentioned that yourself. What are your thoughts on where lags are at the moment in terms of the review of the past 5 years and when do you expect that some of the tightening of monetary policy will start to bite down on inflation?

Adrian Orr:  So I won't respond to that. In a forward-looking sense, we're not here to talk about the stance of monetary policy going ahead. Some of the lessons in the past have been really around supply side shocks, how significant they can be and how difficult it is for monetary policy to manage within that. One of the more recent lessons of the supply side shops is how quickly they are being passed through into headline inflation. It's a common phenomenon across the globe at the moment. Normally there's quite a lag between a relative price shift through to generalized inflation that seems to be a lot quicker at present.

Media: And how surprising is it that that lag is that much quicker?

Adrian Orr:  That's only one part of the lag. There are many other parts.

Paul Conway: So normally that lag is between interest rates and inflation and we tend to think of it as being around 18 months. But you know we're always reviewing those types of assumptions to see if that's changing as the kind of structure of the economy is changing. But you know monetary policy will affect the economy I mean almost instantaneously because we see interest rates going up in other parts of the economy, then it sort of feeds into the real side of the economy — so production decisions and then eventually it sort of gets into inflation, so it's that whole transmission chain that you know the Governor's referring to has been as many parts to the ways in which a monetary policy decision will influence inflation.

Another question for The Reserve Bank Governor. Do you have any concerns that criticism of The Reserve Bank has become quite personal in terms of attacking you? I'm thinking of opposition parties — in particular the ACT party?

Adrian Orr:   I have no comments about the politics. I also don't feel unique. Globally, central banks throughout the world are under immense attack much of it which becomes uh very personal very quickly. All I can say is I'm extremely proud to be leading this institution and continuing to act totally consistent with the mandate.

Media: Just following up Brent's question about understanding the impact of fiscal policy —  what you guys are saying does that indicate that if you had understood fiscal policy better and what impact it would have you might have had the need for less QE and consequently house prices might possibly not have gone up as high as they did. Is that a fair inference?

Paul Conway:
Yeah I'm happy to speak to that. I think the thing around fiscal tools is that they're brand new, so we are in the process of understanding the economic impacts of these tools and as we sort of further our understanding of how these tools work, then the sort of coordination between fiscal and monetary policy tools will continue to improve. As far as the housing market goes, you know that that's sort of about the overall level of stimulus and we don't target what happens in the housing market. We target inflation and we support maximum sustainable employment. So you know what happens like how I sort of demand push in the housing market sort of translates into more houses or higher prices depends on how supply and the housing market responds which is nothing to do with with what happens in this in this building.

Adrian Orr: Can I just just add to that. I really do hope this document helps people clarify what we're trying to achieve around our targets as opposed to other asset classes or sites. The level of monetary conditions that we're trying to achieve to be seen as consistent and then the instruments we choose to use to achieve that level of monetary conditions. Correlation and causation has been very confused over the last 2 to 3 years publicly because so much of it is new and happening fast. It is the level of monetary conditions that drives demand. The choice of instruments is very much a second order issue and I think it's important for people to understand that.

Media: Alexa Cook from TV3. With the benefit of hindsight if you went back to the start of last year what would you do
differently in terms of tightening monetary policy?

Adrian Orr: Paul, you might want to repeat for message.

Paul Conway:  If the Monetary Policy Committee had perfect foresight at that time, which it obviously didn't — it's obviously not possible to have that, then monetary conditions would have been tighter coming through 2021 than what they actually were. And that I'm talking about monetary policy conditions. So I'm not talking about the OCR or the LSAP or the flip, the actual instrument, I'm talking about the overall level of monetary conditions and had monetary conditions being tighter coming through 2021. If MPC had perfect foresight, inflation would have been marginally below where it is now. It probably would have had a 6 in front of it instead of a 7.

Media: And for Adrian, you know the national party has been very critical of yourself and your role as the Governor so I'm just wondering — you know they say this is a bit of a you know patting yourselves on the back kind of exercise is that the case?

Adrian Orr:  I haven't heard them say that and of course it's not the case, we wouldn't have independent external reviews if I wanted
to write it myself and I would have been asked the Board to be here.

Paul Conway: Can I just add it’s part of our legislation that we have to do this review, but as Neil spoke about in his opening remarks it's the kind of thing that we would have just done anyway. We're not in the business of patting ourselves on the back — we're in the business of learning from the conduct of monetary policy so that we can be even better at it going forward and that's exactly the kaupapa of this document.

Media: Just a quick follow-up on the housing market. The report makes the point that you expected house prices to drop 9%  in 2020 but they actually rose 17%. Taking your point you don't target house prices or asset prices but was that mis-forecast or you know miscalculation on the housing market not in itself you know cause to rethink maybe the underlying strength of the economy. Was the housing market not an indication of a strong underlying economy than you'd assumed?

Paul Conway: I think that the housing market rebounded or grew when everybody was expecting it to decline, you know it's not like there was a moment where we kind of went and I wasn't here. I'm sort of talking from the benefit of having been involved with the report, you know it slowly unfolded. It became apparent that the economy was stronger than anticipated. There wasn't a sort of you know lightning moment where it's not a binary thing. So it happened gradually over time, and of course the housing market is only one indicator that we have regard to so we were weighing that up in the context of everything else that was going on in the economy at the time. 
So this document captures the richness of the other factors that were going on at the time —  for example, business lending was still declining significantly. I'm looking across to Karen who was on the other side of the fence of the stage working within Banks expecting a wall of defaults and businesses had no interest whatsoever in borrowing or investing. So whilst you can have a spent up on a house if your employer is thinking about shutting business that's quite different and likewise the ongoing absence of vaccines, absence of being vaccinated so and so forth there is just such a rich picture of which house prices would be one variable.

The other thing about the housing market at that time is there was a change in preferences. So we were all or those of us are lucky enough to be able to keep working from home were doing so, so housing became more valuable to us because we were spending more time there. So you know it was certainly indicative of an economy that wasn't tanking as badly as people thought when the pandemic was just sort of cresting but you wouldn't just sort of look at that indicator and go oh okay everything's going to be fine because of the change in those underlying preferences across people. 

Karen Silk: Certainly, the private sector itself from a banking perspective were also taking into account the level of subsidies that were going on at that point in time, and anticipating when those were removed that it would be a very different picture that we would be facing into and that the real fear for us was unemployment and the impact that that would have then on people's ability to service debt at that point in time. So, this was a very different picture to the one that you could look at when just going well minus 9 plus 17. It wasn't as simple as that at all.

Media: I just want to ask a question about maximum sustainable employment. The report makes the point that it's perhaps not as well understood as it should be and that could be refined that definition and I was wondering if that would include some sort of a numerical target or if not, you know how would you expect to refine that?

Adrian Orr: I'll let Paul talk to the refining but I just really want to emphasize a point and sort of pretty similar to the no regrets one. People forget a critical word when we talk about our mandate, and that is the word support. We are here to support maximum sustainable employment. We're not here to target a level. We cannot target a level. We do not control the level of employment. Monetary policy does not do that. We are just asked to in our monetary policy operations support maximum sustainable employment in part that is why we are not that thrilled about trying to define one single indicator of what it is because there is no such indicator and on top of that, we can't target it all.

Paul Conway:  As the Governor said, we're never going to come up with one number and say this is what and we're certainly not going to target it because that's not what's in the Remit. We're there to support it. We target inflation and in a way it's easy to target inflation because it is one number and we can see what it does quite clearly, whereas maximum sustainable employment is a more
nebulous concept and as you'll know from reading our monetary policy statements, we look at a broad range of indicators of what's going on in the labour market relative to a period when we thought the labour market was broadly at maximum sustainable employment but we've sort of learned from doing this work that that concept is not particularly well understood publicly, and as the Governor said, our the role of MSC and our monetary policy framework isn't that well understood.

So I think you know this I should say more generally a lot of the stuff we're learning from this report — a lot of the comments that Lawrence in particular made in his remarks on the report are feeding into a sort of refreshed research agenda within the economics department here at the Reserve Bank and one of the planks of that research agenda will be around continuing to sort of improve our understanding of the labour market in general and what we can sort of learn from that and more particularly around how to sort of think about MSC in a sort of nebulous concept that's useful to the Monetary Policy Committee as it works to support maximum sustainable employment in its decision making.

Media:  Just one other final quick one — the report speaks about the effect of lower bound, it says that when you cut the OCR to 0.25 that was the effect of lower bound but obviously you were talking about taking it into negative territories so could you just help me understand how 0.25 could be the effect of lower bound if you know obviously you think it would warrant it would be beneficial to take it below 0?

Adrian Orr: Just to refresh your memory that at the time of a 0.25, the banks in their operating capability could not go negative with interest rates. So, it was an effective lower bound. They were even concerned around having a 0 in their machinery so the plumbing is critically important and we're working with the banking system at the time in advance of this particular COVID crisis around being operationally ready to manage a range of additional monetary policy tools. We signalled all of that in late 2019 — reminded you all in early 2020. We didn't expect to have to be then implementing it as early as we were only a few weeks later as the COVID-19
pandemic spread, so that's the effect of lower bound.

Around the choice of instruments, even if it could go negative I'd say the jury was out as to which is the most effective tool anyway —negative interest rates versus quantitative easing and as Paul said there will be lots of scholar research for a long time to come I know our Swedish colleagues who went into negative retail interest rates have a lot of lessons as well just like other central banks who use quantitative easings have lessons. 

Paul Conway:
So the effect of lower bound or you know it changes through time depending on or a whole bunch of things.

I kind of think of the 0.25 as being an operational effect of lower bound at the time, given that the commercial banks couldn't, you know their systems couldn't cope with negative or even zero interest rates, and as that capability is developed, the effective lower bound will decrease . 

Media: But you can't tell us what that new lower bound is now the banks are capable of going below zero?

Adrian Orr: Well they're capable of going negative, but no we can't tell you what that effective lower bound is. We would have to be doing lots of real time estimates with large wide confidence intervals.

Paul Conway:  That sort of comes down to people, you know if you're if you've got your money in the bank earning negative interest why don't just take it out and keep it as cash. Where is that point and there's actually a point where negative interest rates become counterproductive in terms of targeting inflation, but as the Governor said there's a whole work agenda that would have to be done around that to come up with what the number is at any particular point in time.

Media: You talk a lot about the lessons that will learn through this tumultuous period, what lessons we'll learn about the OCR as a main tool of monetary policy. Does it need to remain a main tool or are there other options that you're becoming more and more interested in pursuing?

Adrian Orr
:  We're very convinced that the OCR is the most effective tool in terms of shortening or lengths in the duration of people's debt, you know creating the monetary stimulus that we need. It's very well understood by the markets. It's easy to implement. It does have relative price distortions as does any instrument but it remains the best short-term instrument for us.

Media:  And a final question for you Paul — what's the biggest lesson that you feel that the Bank learned throughout this process or the most the most cutting one?

Paul Conway
: I mean like we've learned a lot. For me, the one that I really like is the fact that we need to learn more about the sort of economic conditions under which monetary policy will be operating going forward so it is more about supply side shocks and you know the effect of climate change on monetary policy decisions. As the Governor said, that's a really big sort of area where we need to do further work but I'm struggling to pick my favourite area for improvement.

Neil Quigley: Paul, could I get perhaps so chime in and give you mine which I think is that you know the challenge with instruments other than the OCR is the lack of flexibility once you move into using those instruments. So the great thing about the OCR is that there is flexibility to move in quite short time frames to adjust the OCR when we get into some of these other monetary policy instruments then it's much more challenging.

Media: Just on economic forecasting — I think in the paper talks about the forecasting deteriorating through 2020 and I think you're looking at work but given your comments about obviously not having perfect foresight and no one could predict when Russia would invade or wouldn’t invade Ukraine and couldn't predict the COVID outbreak either. How do you improve forecasting in those circumstances?

Paul Conway:  That's a good question, thanks Brent. You know economic forecasts are pinch of salt material at the best of times so the economy is a huge complex beast and understanding how it's going to evolve through time and predicting the behaviour of people is challenging as I said at the best of times. The last 5 years have not been the best of times. But having said that I think there’s things that we can do in terms of bringing new sources of data into our forecasting systems.

I think there's been a revolution in micro data in the economics community globally I think, and we've got work happening in that space. But I think sort of looping that into the forecasting system is one way forward I think you know just sort of doing some of the empirical work that we need to sort of get back to around the shape of the Phillips curve and you know all those economic relationships and how they've sort of changed and altered over the course of the last 5 years is vital as well. Of course, we're doing that work but I really want to sort of amp that up given the global environment is that it feels different than what it was prior to the pandemic. So I think it's very important that we refresh our understanding of how it works and feed that back into the forecasting system — which I should say, our forecasts if you've read the relevant bit in the paper you know our Reserve Bank forecasts are among the best in the business in
New Zealand. We do a good job of forecasting here as you would hope being a central bank, but yes of course we can improve that.

Adrian Orr:
  I think one other challenge for us is our desire to be transparent, our desire to provide forward guidance also leads to the risk of being seen as overly precise with economic projections 1 to 2 years ahead. They are guiding tools at that point in time. The good news is we get to repeat that projection every 6 weeks so there is adaptive learning as you go through, but no adaptive learning will help you during a period of extreme shocks as we've received recently.

Our biggest surprises in the forecasting horizon were starting points, i.e every time we turned up 6 weeks later a continued new shock was happening and so that was the nature that we were we were living amongst.

Media: Just adding on from that, your interest rates for the 3-year period have been quite off the mark recently. Is it worth continuing to do the 3-year where your cash rate is going to be in 3 years?

Adrian Orr: Yes it's providing an indication of where we believe at that point in time, subject to no future shocks, monetary policy is most likely to continue. The great news about putting that out there is that there is a financial market that then bets for or against those positions. So the interest rates that actually matter are those that prevail in the market. I do note that our forecasts have been over a short period incredibly well watched and received by financial markets. There’s some diagrams in there around our full guidance and where interest rates have actually gone. That has been a very strong and clear communication tool for us so that's the main reason. 

Remember our foreign exchange forecast — they're a straight line effectively from where they are at that point that day. That's our best estimate forecasting where it's going next. So you know there are many variables that we have to have a view on including how they interact with each other, but it's about maximum transparency, trying to have as much information to get above the noise that's in a financial market at any point in time, but always read as Paul said with a pinch of salt — more things can happen than actually

Media: There was 9 things that you guys could do better. Where do you go from there on working on those numbers?

Karen Silk:  So we've already kicked off a work programme — both across the economics team — Paul's talked about some of the things in the Ford research agenda but also in Vanessa Rayner's markets team as well where we are reviewing the tools that we have available, taking into account the lessons that have been learned and also building future scenarios around appropriateness of when you might use those tools as well, and then of course the key point of ensuring that the right coordination and alignment exists between fiscal, monetary and I would also bring into this Prudential Policy as well.

Paul Conway: With COVID, we've all been a bit insular across the economy and certainly here there's a feeling that we're sort of coming out of our shells a little, and we're getting international connections back in place and sending people away to courses and having them come back with lots of new intel. I'm actually super excited about the agenda that's coming together off the back of this report. I think it's going to stand us in very good stead going forward.

Adrian Orr: We'll be a Global Research agenda — these 9 lessons I would say very confidently are consistent across almost every central bank globally. I say that having recently returned as of yesterday from the Bank of International Settlements with over 30 other central bank Governors. All of the topics discussed today being covered, and a lot of sharing and collective learning is well underway from neutral interest rates through to balance sheets, profits and losses.

Media: Question for the Governor about the removal of the LVRs and could you talk about how that affected the outcomes in hindsight and in hindsight would you have removed them again?

Adrian Orr: So the removal was done to ensure that all of the additional monetary policy work we were doing was able to operate through all possible economic channels that was you know, to open up emergency type activities we were doing —  we didn't want to trip ourselves up through our own regulatory barriers. Very early on as you can see, we saw that the housing market had found its mojo very quickly and so the LVRs went back on. So it was a short period — one in which we were positively surprised that activity was happening and so the LVRs went back on throughout that entire period. The quality, I say the robustness of banks’ balance sheets improved their mortgage balance sheets were actually improving throughout around loan to value ratios so you know neither here nor there.

The hindsight question — I don't really want to answer that. In hindsight, it was unnecessary to have removed them and foresight we removed them out of caution.

Media: and for the Governor again. Quantitative easing has been criticized around the world for increasing asset values and having an effect on wealth distribution across societies. What role if any, did your consideration of the effect on any wealth distribution have in your thinking in the last couple of years?

Adrian Orr:  Thank you Bernard. We chatted a bit earlier, I know you were late to the party. We chatted a bit earlier around it's the level of monetary conditions not the particular instrument that determines what then happens around relative demand, supply and chase. So, I know that it's correlation leads everyone to look at quantitative easing. It's the level of monetary conditions that created all of the different relative price behaviours not the instrument. In our case, to be even more confident around the instrument is the fact that we only bought government bonds from the secondary market. We didn't go and buy other asset classes and we weren't doing it directly from government. So, some of the extra concern around whether quantitative easing and distortion on the allocation of capital doesn't stand for New Zealand because of the narrow means by which we used it. 

As for the distribution of costs and benefits, that is a perennial challenge for monetary policy. We can only operate at the aggregate. We can't say winners, losers, when you look across it there's borrowers, lenders, first home buyers, owner occupied, dollars rented such a vast array — importers, exporters, so and so forth. We have written extensively and will continue to write extensively around what our actions imply but in the absence of tools, it's about alerting other policy makers and individuals themselves around the potential benefits and hazards of these tools.

Paul Conway: It sort of cuts to the fact that monetary policy is a blunt instrument.

Media: There's been a lot of chat about social license and the banking industry — to the Governor, do you think that the Reserve Bank retains its social license in the wake of the last 2 and a half years?

Adrian Orr:  The Reserve Bank — we have our legislation, our mandate, we will continue to operate. I think it's times like this it shows the importance of the operational independence of central banks to continue to get on and do their job and this document says that's exactly what we've done.

Media: I note that you sort of emphasize that people can look through the support and reach different conclusions often the ones that you've drawn from the information you've provided there. But how would the Bank feel about an independent enquiry into the same matters covered by the support?

Neil Quigley:
 Personally, I don't see an independent enquiry as being necessary given that we have provided the level of information that we have here. But, of course, if there was to be an independent enquiry, in addition to this one, we would cooperate fully and welcome it. So we're entirely open to that. Part of the point of this report and the way it's been framed and all of the information we've
put out is to say we don't feel we have anything to hide and of course being a central bank as Adrian said many times already just in the last 50 minutes, that you know there are lots of people providing commentary on everything that we do, so we would treat a further external review simply in that vein as more external input into what we're doing.

Adrian Orr:  Thank you very much. Thanks everybody.