Monetary policy alone won’t solve New Zealand’s cost-of-living crisis, Reserve Bank (RBNZ) chief economist Paul Conway says, instead pointing to structural reform as the key to long-term prosperity.
Conway’s speech, delivered to the National Financial Advisers Conference in Auckland on Wednesday, stressed while low and stable inflation created the conditions for growth – structural policies were key in not only long-term growth, but the economy’s resilience in times of shock.
While the “most important contribution” monetary policy could make to improving long-run growth and purchasing power is to deliver low and stable inflation, Conway said that was insufficient on its own in lifting productivity and improving purchasing power. And while monetary policy played a critical role in responding to shocks, it could not solve New Zealand’s ‘cost-of-living crisis’, he said.
“Low and stable inflation underpins economic stability and is critical for sustained gains in purchasing power. But monetary policy does not create prosperity directly. It creates the conditions in which prosperity can endure.”
Structural policies, on the other hand, shaped long-run potential growth, influence how competitive markets are, how easily resources shift from low- to high-productivity firms and sectors, and how quickly new technologies diffuse across businesses, he said.
“New Zealand was once at the frontier of structural reform. That edge has faded over recent decades. While our structural policies differ in some ways from those in many advanced economies, those differences have not produced better outcomes.”
“A more fragmented and unpredictable global economy raises the stakes for ensuring that New Zealand’s structural policy settings are resilient, adaptive, and fit for purpose,” Conway said.
He described the new era of heightened geopolitical risk and persistent uncertainty as “not a temporary shock that we can simply wait out, it’s a durable shift that makes the global economy more difficult and dangerous for small economies like New Zealand.”
In light of that, a more resilient and flexible economy “would mean monetary policy does not have to work as hard, or be as aggressive, to stabilise inflation as shocks wash through the economy.”
“The cost of living isn’t just about inflation or the price level, it’s about purchasing power,” Conway said. “Even though inflation has fallen from its highs, prices are now much higher than they were before the pandemic.”
Conway said New Zealand’s purchasing power was “at best, average” compared to the OECD.
“Improving the purchasing power of New Zealand households requires improved productivity. Productivity gains support stronger real wage growth, while competitive markets help keep price increases in check. For example, higher productivity in the construction sector would mean more affordable housing, lower infrastructure costs, and reduced pressure on council rates.”
Getting structural policy right was both challenging and critically important in New Zealand.
“Our persistent productivity underperformance suggests scope to improve structural policies,” Conway said.
“Reasons for that underperformance include limited international engagement by Kiwi firms, persistent gaps in innovation and skills, weak investment that constrains capital deepening, and a slow diffusion of productivity-enhancing technologies across the economy.”
Conway said while New Zealand was once on the frontier of structural reform, the edge had faded over subsequent decades.
“To sustain living standards, policy must continuously evolve to improve competition, innovation, investment, and global engagement. That is the structural foundation for lowering the cost of living in New Zealand.”
He said since the early 2000s, when New Zealand was considered a leader in pro-competition regulation, regulatory reform had been much weaker than in most other countries – reflected in New Zealand’s regulatory settings rated below the OECD average.
“This pattern suggests more of a ‘one and done’ approach to regulation here, in contrast to continuous regulatory upgrading elsewhere.”