2012 Annual Report
The Official Cash Rate has remained unchanged for a record 12 reviews, with markets expecting more of the same ahead. This policy stability is in the face of a very unstable international economic situation and continuing gradual recovery in Canterbury.
The slow recovery in the US, and particularly the simmering Eurozone crisis have cast a shadow over world growth following the GFC. In New Zealand, recovery has been slower than we would have liked, with trading partners affected by Europe and bank funding enduring fragile periods.
We are coming to terms with a very different world, one with lower price pressures, very low or even negative interest rates, slow growth and recurrent crises. New Zealand businesses need to find ways of operating within such an ongoing environment. The Reserve Bank needs to ensure its monetary and financial policies are robust in such a world.
The other important area of uncertainty is the Canterbury earthquake rebuild. This will eventually provide a significant boost to nationwide activity for an extended period. However, the region has faced a number of significant challenges that have resulted in delays, including complex insurance issues.
Nevertheless, we expect increases in activity in the region over the coming years: repair work has been gradually increasing over recent months, and the development of plans for reconstruction of the central city will assist with investment decisions.
These uncertainties apart, we see more positive signs ahead. Commodity prices have softened but remain reasonably strong. Our important markets in Asia have so far remained reasonably robust. We have just ended an excellent farm season. Banks have sufficient capital, funding and willingness to finance more economic activity. Interest rates are at historic lows.
In this environment, we have had several business priorities in place to promote resilience for the Bank, the economy and the financial system. This Annual Report tells of progress on those priorities for 2011–12, highlights of which are shown below.
These projects, and all the business-as-usual, have drawn heavily on the skills of our policy and industry analysts, and also our backroom operations teams, bringing expertise in information technology, financial services, human resource management, risk management, communications and property management.
To Chairman Arthur Grimes and the Board my deep gratitude for advice and assistance. I thank all our staff for playing their role in improving our country's future. I especially owe thanks to our group of senior managers, to my Deputy, Grant Spencer, and my assistant, Jo Lawrence, for all the guidance and support through challenging times.
I have had a turbulent but hugely rewarding decade as Governor and Chief Executive. On 25 September, I will leave the Reserve Bank in the capable hands of my successor, Graeme Wheeler. I wish him all the best in leading the Reserve Bank in its roles of helping promote economic growth for New Zealanders by maintaining price stability and a sound and efficient financial system.
20 August 2012
Highlights of the year
- The Bank has developed an internal financial monitoring report, designed to measure financial imbalances within the economy. This is monitored quarterly by the Bank's Macro-Financial Committee, and the messages are reported in the Financial Stability Report.
- We have outlined four macro-prudential tools that we could consider using if future credit conditions were to warrant it. With credit conditions in New Zealand subdued, there has been no immediate need to deploy such tools. However, the Bank continues to research the efficacy of potential macroprudential instruments.
- Despite subdued business conditions, New Zealand's banks continue to perform well, with lower non-performing loans; and funding channels have stabilised sufficiently to allow us to confirm a further rise in the core funding ratio to 75 percent from 1 January 2013.
- The non-bank deposit taking sector continues to consolidate after the implosion of finance companies in the past five years. A new statute establishes a licensing regime, which will be implemented over the coming year.
- Another product of the GFC experiences, the Basel III prudential requirements for banks, is expected to be finalised in 2012, and the banking industry will have to comply with the core capital requirements from the beginning of 2013. New Zealand's own quantitative liquidity requirements, earlier than, but consistent with, the Basel III liquidity requirements, are already in place.
- In late 2010, the Bank took on responsibility for prudential supervision of the insurance industry. This has been a significant addition to our powers to ensure a sound and efficient financial system. It is pleasing to report that we granted over 100 provisional or full licences by the deadline of March 2012. The Bank is now working with licensed insurers on their transitional path to obtaining a full licence by September 2013.
- The Bank is preparing to implement the anti-money laundering (AML) supervisory regime from 1 July 2013, in conjunction with other government agencies, in a way best suited for New Zealand.
- With significant initiatives throughout the Bank, including the new prudential responsibilities, we put in place programmes to develop staff, align objectives, and encourage collaborative work across departments.
- In the light of the post-GFC environment we have reviewed the structure of the Bank's foreign reserves, linking to a wider range of investment assets and the establishment of new benchmarks for assessing performance. This new benchmarking framework is now about to be implemented.
- Planning for a new series of banknotes is well under way. We have established requirements for the selection of security features, substrate, and the providers of design and print services. This is a major project, and is on schedule to deliver the first new notes in 2014.
- We also introduced systems to reduce risks in New Zealand's multi-billion-dollar payments system. We have added a new interface, Settlement Before Interchange, to our interbank settlement system, allowing banks to settle retail transactions at regular intervals during the day rather than once a day.