Reserve Bank got Covid start right, but held low rates too long, review finds
An independent review says the Reserve Bank made the right calls at the start of Covid-19, but kept support for the economy going too long.
The assessment was reported on 22 September 2026. It focuses on decisions by the Monetary Policy Committee (MPC), the panel that sets interest rates, during the pandemic and the lift in inflation that followed. RNZ
What the review looked at
The review was done by MIT Professor Athanasios Orphanides and former Reserve Bank Assistant Governor David Archer, the review said. They looked at MPC decisions and the analysis behind them.
At the start, the Bank cut its main dial, the official cash rate (OCR), to 0.25 percent. The OCR helps set mortgage and savings rates across the economy. It also used Large Scale Asset Purchases (LSAPs), buying bonds to hold longer-term rates down, and a funding for lending programme to get more money flowing. In June 2020, the MPC agreed to keep the LSAP programme going to hold interest rates low, the review said.
That low setting stayed. In August 2021, the Bank held the OCR at 0.25% after a snap Covid-19 lockdown put off an expected rise. The economy bounced back faster than expected, but policy did not shift quickly enough, according to the review.
That mix of continued help and a stronger recovery created excess demand, where spending runs ahead of what the economy can supply, and pushed inflation up. The review said it took a full year for policy to adjust after the first stimulus had done its job.
Inflation rose to 7.3 percent, 5.3 percent above target, the review reported. Unemployment fell to 3.2 percent, which the review described as an unsustainable historic low.
The review also found a practical gap. A Negative Interest Rate Policy, a back-up option for when the OCR cannot usefully go lower, was not ready to use.
Its fix is about process. The review recommended the Bank build a framework for deciding under uncertainty, with a clearer step-by-step approach and testing of more possible futures.
What the Bank is doing now
The Reserve Bank said work is already under way. It reported it has built new tools to estimate neutral interest rates, the level where rates neither push nor hold back the economy, and to run scenario analysis of different paths. Reserve Bank It has published an analytical note modelling what different settings after Covid would have done, using its main forecasting model, and a bulletin titled Our response to the 2022 monetary policy review.
On the public record, Cabinet paper ECO-25-SUB-0127 covers an independent review of the pandemic response. Direct interest rate losses to the Crown from the LSAP programme were put at about $10.4 billion to the end of April 2025. Treasury The Bank's aims remain price stability and maximum sustainable employment. The OCR has since normalised. The Bank cut its benchmark rate by 50 basis points to 2.5%, a three-year low, in October 2025, then held it at 2.25% in February 2026. Reuters
The broader context here is about deciding when information is unclear, not the first call. The review backs the early easing but questions when to pull back, how much weight to give surprises in the forecasts, and whether back-up tools were ready. The test will be whether a clearer approach and wider testing help the MPC spot excess demand earlier and act when the recovery beats its own expectations.
