Reserve Bank kept Covid stimulus too long, independent review finds

An independent review has found the Reserve Bank's initial Covid-19 monetary response was appropriate and praiseworthy, but stimulus stayed in place too long.

The assessment was reported on 22 September 2026. It centres on the Monetary Policy Committee's decisions through the pandemic and the inflation surge that followed. RNZ

The review was conducted by MIT Professor Athanasios Orphanides and former Reserve Bank Assistant Governor David Archer. It examined decisions made by the monetary policy committee (MPC) and the analysis around those decisions.

The initial toolkit was aggressive. The Reserve Bank slashed the official cash rate (OCR) to 0.25 percent. It used Large Scale Asset Purchases (LSAPs) and a funding for lending programme to put more money into the economy. In June 2020, the MPC agreed to continue with the LSAP programme aimed at keeping interest rates low.

That low setting persisted. In August 2021, the Bank held the OCR at 0.25% after a snap Covid-19 lockdown delayed an expected rate hike. The review found the economy recovered more strongly than expected and policy did not adjust quickly enough.

Continued stimulus combined with that recovery created excess demand and significantly increased inflation. The lag was a year. The review found it took a full year for policy to adjust after the initial economic stimulus had achieved its intended result.

The numbers are stark. The review reported inflation rose to 7.3 percent, 5.3 percent above target. Unemployment fell to 3.2 percent, described as an unsustainable historic low.

The review also found an operational gap. Negative Interest Rate Policy was not ready for implementation when the OCR approached its lowest practical level.

Its prescription is procedural. The review recommended the Reserve Bank develop a framework for better decisions under uncertainty, with a clearer systematic strategy and testing of a wider range of scenarios.

The Bank has pointed to work already under way. The Reserve Bank of New Zealand reported it has developed new tools to estimate neutral interest rates and run scenario analysis to improve monetary policy after COVID-19. Reserve Bank It has published a counterfactual analytical note simulating the effects of different monetary policy settings after the COVID-19 pandemic using its macroeconomic forecasting model, and a bulletin titled Our response to the 2022 monetary policy review.

The fiscal and governance footprint is part of the record. Cabinet paper ECO-25-SUB-0127 concerns an independent review of the monetary policy response to the COVID-19 pandemic. As of the end of April 2025, direct interest rate losses to the Crown from the LSAP programme were estimated at around $10.4 billion. Treasury The Bank's monetary policy objectives prioritise price stability and maximum sustainable employment. More recently, the OCR path has normalised. New Zealand's central bank slashed its benchmark rate by 50 basis points to 2.5%, a three-year low, in October 2025, then kept it unchanged at 2.25% in February 2026. Reuters

The broader context here is about decision-making under uncertainty rather than the initial call. For readers who work with the framework daily, the review validates early easing while questioning the criteria for withdrawal, the weight given to forecast surprises, and readiness of alternative instruments. The test will be whether a more systematic strategy and wider scenario testing change how the MPC identifies excess demand early and acts when recovery outruns its own projections.