Many of the world’s major central banks cut policy interest rates to zero during the crisis. However, these economies still needed further stimulus to meet the objectives of monetary policy. As a result, some central banks introduced what were termed “unconventional” monetary policies to further ease financial conditions and provide additional stimulus for output and inflation. These policies included negative policy interest rates, large-scale asset purchases, and targeted term lending to the banking sector.
Overall, these policies were successful in easing financial conditions, and emerging research suggests they boosted inflation and activity. However, they were not without potential costs. Central banks have successfully managed additional balance sheet risks, potential financial stability risks and the possibility for adverse impacts on financial markets.
Currently, monetary policy settings are stimulatory in New Zealand, and the Bank is not projecting a significant decrease in the OCR. With the OCR at 1.75 percent, the Bank has significant further room to ease monetary policy in a conventional way, and conventional monetary policy remains effective in influencing inflation and activity. However, it is prudent to learn from other countries’ experiences with unconventional monetary policy and examine how such polices might work in New Zealand if the need arises.
The authors, Sarah Drought, Roger Perry, and Adam Richardson, find that there is qualified potential for such policies in New Zealand. Interest rates could likely be lowered into modestly negative territory, and targeted term lending facilities could be introduced. Asset purchases would also be effective. However, the structure and size of New Zealand’s financial markets could limit the overall scope of such a programme. In addition, the exchange rate is likely to play a more important role in easing financial conditions than was seen in the United States and the euro area.