Has The Reserve Bank Responded Differently To Upturns & Downturns In Inflation & Economic Activity?

This analytical note examines whether the Reserve Bank has responded differently to upturns and downturns in inflation and economic activity.

The paper finds that in normal times a small movement in inflation away from the 2 percent mid-point target – either up or down – has resulted in a similar-sized change in the Official Cash Rate.

However, during sharp downturns in activity as witnessed during the Asian Crisis, the Global Financial Crisis and the Christchurch earthquake, the Reserve Bank cut interest rates more than what it would have in normal times to bolster the economy.

This contrasted with the Bank’s milder policy responses during booms in economic activity.