How a bird inspired the Reserve Bank's approach to COVID-19

The Reserve Bank (RBNZ) says its bold response to the economic shock of the pandemic was inspired by a bird that fittingly appears on our money - the kōtuku.

When COVID-19 arrived on our shores last year, the RBNZ responded by slashing interest rates to a record low 0.25 percent, where they've stayed ever since. 

Independent economist Cameron Bagrie on Tuesday said the RBNZ brought out other "big bazookas" too, including "a large-scale asset programme (ie. money-printing), a funding for lending programme".

"They deployed pretty well every tool in their arsenal under their strategy of least regret, to make sure that the plumbing, the economic system, was going to be functioning well."

In a speech released on Tuesday - but not physically delivered, thanks to the current outbreak - RBNZ Assistant Governor Christian Hawkesby said in the past, most central banks' moves have been described as being hawkish (higher interest rates) or dovish (lower). 

"In Aotearoa New Zealand, our equivalent birds are the kahu (the harrier hawk) and the kererū (the wood pigeon). But when it comes to making monetary policy decisions under uncertainty, it may be that the kōtuku (white heron) provides a much more fitting metaphor."

Unlike this year, with a strong economy and low unemployment pushing up wages but also inflation, all the risks the RBNZ could see in March 2020 were "heavily skewed in one direction… biased to the downside". So it decided on a "least regrets" approach - going hard to ensure its goals are met.

"In Māori culture, there are two whakataukī (proverbs) involving the kōtuku that capture this trait of responding to the environment around you," said Hawkesby.

"The saying 'he kōtuku rerenga tahi' loosely translates to 'a white heron’s flight is seen but once'. This whakataukī expresses an idea that 'once ready, open your wings and commit to flight'. 

"Applying this to the protocols of a marae (meeting house), it is used as a reminder that when it is your opportunity to speak, you may only get one chance, so you must take your chance and be bold."

In monetary policy, Hawkesby said it equates to the path of least regret being "to move quickly and take large steps to provide more confidence that policy settings will be appropriate if the risks to the outlook eventuate". 

But it's now perhaps time to look to a different whakataukī, Hawkesby said.

"The saying “tapuwae kōtuku” translates roughly to “considered steps”, as you assess the environment around you.  In the world of setting monetary policy, this translates to having confidence in the outlook for the economy and inching in the right direction based on how the economy is likely to evolve. 

"This is consistent with the observation that when there is a typical amount of uncertainty, and the risks are evenly balanced, then central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25 basis point increments."

That was the plan last month, before the current outbreak. Hawkesby said the RBNZ still sees reduced stimulus the new path of least regret, with house prices "unsustainable relative to their fundamental drivers" and "persistent inflation pressures" in the medium-term ahead.

Bagrie said the success New Zealand had at eliminating the virus last year boosted the economy, and now the RBNZ has to find a way to lift interest rates, " a pretty tough ask when you've got pretty big parts of the economy that's still in… lockdown".

"The way the market is interpreting COVID and lockdown at the moment is that it's a temporary reprieve. In fact, financial markets are still anticipating, pricing in the probability that a 0.25 percent hike in three to four weeks is basically a done deal. The market is now erring towards a potential where we could have a 50 basis point hike. 

"If you look at the economic data, what we're seeing pre-COVID, you can rationalise that on every single level."

But now there's the threat of the virus not being eliminated at all, with the move to level 3 while mystery cases are still popping up. Bagrie said there's a risk we'll end up like Australia or the US, with widespread transmission. But no one knows yet how it's going to play out. 

"The complicating factor is that monetary policy is not just set for conditions today - it's set for where the economy could be in 12 to 24 months… Financial markets in New Zealand seem to be betting strongly that the OCR is going to be moving up pretty aggressively in the next six to 12 months. That's a big ask when you've got potentially an economy that could be at a level 3 lockdown in Auckland right through until Christmas." 

The next update to the official cash rate is expected on October 6, just two days after the next scheduled update to New Zealand's alert levels.