New Zealand needs to avoid a costly regulatory over-reaction to the Christchurch earthquakes, Reserve Bank Governor Alan Bollard said.
But is he also warning us to expect an increase in the official cash rate?
It would be inappropriate, all things being equal, for monetary policy to be stimulatory during the reconstruction period . . .
Disaster preparedness was necessary and desirable, but not costless, he said.
Increases in safety standards, such as seismic strengthening, can result in significant costs for an economy that linger long after the risks they aim to address have occurred. They can also create a complicated regulatory environment that may result in significant impediments for activity.
“The challenge here will be to avoid a costly regulatory over-reaction to a one-off event,” Bollard said. Consistent with the Policy Targets Agreement, monetary policy does not react to such short-term price changes.
The bank’s 50 basis point reduction in the official cash rate after the February earthquake was an insurance measure to avoid a significant and persistent deterioration in activity.
“We were conscious, however, that depending on wider economic conditions, this insurance would need to be removed as rebuilding, and a recovery in activity more generally, drew the economy’s resources into production.
That sounds like an intimation that the cash rate will be increased once the Christchurch rebuild kicks in.
He also said a substantial earthquake in Wellington might require Central bank intervention.
“A bad Wellington earthquake with an epicentre in the nation’s capital, could engender a more extreme financial market reaction, and it would be the Reserve Bank’s role to intervene to ensure an orderly foreign exchange market if that proved necessary.
“If the country’s political leadership and key administrative infrastructure were caught up in an earthquake, this could drive a bigger financial reaction, and make government policy responses much harder,” he said.
The full speech, Economic impacts of seismic risk: lessons for Wellington is here.
It includes lessons from Christchurch:
We have long known that this region is at risk from seismic events, and clearly we must prepare for potential disruptive events of any sort. However, we must also consider what degree of preparedness is appropriate to ensure the survival of people, as well as organisational effectiveness. Several factors are relevant in this regard.
- Disaster preparedness is necessary and desirable, but not costless. Increases in safety standards (such as seismic strengthening) can result in significant costs for an economy that linger long after the risks they aim to address have occurred. They can also create a complicated regulatory environment that may result in significant impediments for activity.
- A related consideration is the frequency of events. While it is possible to prepare for very low-frequency high-impact events, doing so may be constraining in terms of activity and prohibitive in terms of costs. The assessment of such risks in New Zealand is currently very complex and there is a lot of work currently going on to assess this.
- We must also be conscious of New Zealand’s characteristics as a nation. In contrast to many other developed economies, we are geographically and economically isolated. If we face large challenges, we may do so with little external financial support.
He also said that institutions should focus on preparedness, competency, leadership, delegation and resilience rather than detailed plans for specific situations that may not repeat themselves.
It would be a waste of time, energy and money to prepare for every event but general preparedness for any event is sensible.