What is the Framework?
The Framework is an agreement between the Board of the Reserve Bank of New Zealand and the Minister of Finance (MoF) and is a requirement under the Reserve Bank of New Zealand Act 2021. It sets out the expectations around the management and use of foreign reserves in New Zealand and the respective roles of the Reserve Bank and MoF. The Framework replaces the previous Memorandum of Understanding (MoU) agreed between us and the MoF.
Download the Foreign Reserves Management and Coordination Framework in full (PDF, 380 KB)
What the Framework sets out to do
The Framework:
- aims to ensure accountability and transparency around our management and use of foreign reserves
- sets a level of foreign reserves that we need to hold to meet our objectives.
What does the law say?
The legislation requires the Framework to include for all foreign currency assets that we hold. It covers foreign reserves to support financial stability and monetary policy intervention purposes — traditionally referred to as foreign reserves. It also covers the foreign assets that we use for day-to-day operations for domestic liquidity management purposes.
Changes under the Framework
Roles for intervention
The new Reserve Bank of New Zealand Act 2021 sets out a more explicit financial stability objective for the Reserve Bank. This means we now have a responsibility to decide when to intervene in the foreign exchange market if there is market dysfunction in the NZD foreign exchange market. In the past, interventions like this generally required a Ministerial direction from the MoF, supported by advice from us. We followed this process in March 2020 at the beginning of the COVID-19 crisis when there were concerns about liquidity in the NZD market — although we did not need to intervene.
This change gives us more independence around intervention for financial stability purposes. This is not a new purpose for holding foreign reserves, but a change in role for the MoF.
Level of foreign reserves
As part of the Framework, we must agree with the MoF on the level of foreign reserves that we need to hold in order to meet our objectives.
The level of foreign reserves has been largely unchanged since 2007. Given the growth in the economy and foreign exchange market since then, our capacity to intervene in the NZD has decreased over time. We consider a range of metrics, international comparisons, scenarios and the overall costs and benefits when deciding on the level of reserves to hold.
Taking all these considerations into account, our Board and the MoF have agreed to an increase in the level of foreign reserves holdings.
In July 2023 the Minister of Finance (MoF) provided an increase in our capital, and a new indemnity to support our Foreign Reserves Management and Coordination Framework announced in January 2023.
The Board must ensure we operate in a financially responsible manner and we prudently manage our assets and liabilities. However, our management of foreign reserves does come with financial risk.
The increase in capital reduces the likelihood that we would have to operate with low or negative equity in the event of a loss resulting from a large exchange rate movement. The indemnity covers specific foreign exchange losses arising as a result of a foreign currency intervention.
The foreign assets on our balance sheet cover:
- foreign reserves we hold if we were to intervene for financial stability or monetary policy reasons
- foreign assets that fluctuate as a result of day-to-day operations for domestic liquidity management.
This means that there can be changes in the data tables that reflect short-term transactions for the purposes of managing liquidity in the domestic financial system, valuation changes or general portfolio management, rather than us actively increasing or decreasing its foreign reserves held for financial stability or monetary policy intervention. The increase in the foreign reserves for intervention will be evident in the increased ‘Foreign Currency Intervention Capacity’ reported in these tables over time.