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Annual Report 2003

Read our Governor's statement and download a PDF of our annual report for the 12 months ending 30 June 2003.

Reserve Bank of New Zealand

Governor's statement

It is with particular pleasure that I present this my first Governor’s Statement in a Reserve Bank Annual Report. I took up this post in September 2002 and in the following months there has been much to learn and the task has been fascinating. I have been ably assisted by my new colleagues and have found much in the Bank that all stakeholders would find reassuring. I have also been encouraged by the Bank’s preparedness to change.

Monetary policy

As Governor Designate in August and September 2002, my first duty was to negotiate a new Policy Targets Agreement (PTA) with the Minister of Finance, this being an agreement specifying how the Bank is to promote price stability

In this I was helped by in-depth research prepared by the Reserve Bank’s Economics Department. As a result, the new PTA was signed on 17 September 2002. The Agreement gives the Reserve Bank a little more flexibility in achieving and maintaining price stability in an uncertain world. This should assist the Bank to minimise unnecessary instability in other parts of the economy as well

On taking up my duties, my initial focus was on bedding-in the new PTA and, in particular, resolving how it would be implemented. The November 2002 Monetary Policy Statement lays out the Bank’s thinking on this, but, in brief, it means using monetary policy to ensure that Consumers Price Index (CPI) inflation remains comfortably within the 1 to 3 per cent target zone over the medium term.

Looking ahead, the Reserve Bank will continue to be committed to maintaining price stability as specified in the PTA. As the Bank’s priorities for 2003/04 show, we will continue to ask the hard questions about how we can best ensure that we are making the maximum contribution possible to sustainable economic growth. Likewise, the impact of exchange rate volatility on New Zealand’s economic performance will remain an issue of keen interest.

In the 1980s and 1990s, the Reserve Bank fought and won the battle against double-digit inflation. In this decade, we are not trying to fight that battle again. The task now is to preserve price stability and the Reserve Bank’s credibility, while also setting monetary conditions so that businesses and people can get on and make their investment and savings decisions so as to get the best outcome for New Zealand.

Financial stability

Another key task for the Reserve Bank is to promote the stability of the financial sector in New Zealand. This role is sometimes obscured by the public focus on monetary policy, but it should not be underestimated. Whereas the public sees monetary policy decisions taken regularly, financial stability decisions usually only become matters of public interest at times of stress. Day-to-day this work is low-key, but, nonetheless, it is extremely important to the well-being of the New Zealand economy. Indeed, the task is a bit like a peace-time army preparing for events that we hope will never happen.

The Reserve Bank registers banks and requires them to meet international capital adequacy ratios and to publicly disclose considerable amounts of information so that people can be informed about the banks that they use. Our focus is on the stability of the financial system as a whole, rather than on the health of any one particular institution as that is the responsibility of their local boards of directors. The Government and the Reserve Bank do not guarantee banks and there is no deposit insurance in New Zealand.

We are looking at how this system can be improved, whether we currently set the appropriate requirements on banks for their normal operations and whether the appropriate tools are in place for crisis management. We are already being a little more demanding of banks in New Zealand, which we think is necessary to ensure that our light-handed regulatory system will continue to work well.

To do this better, we have carried out an internal restructuring. I am very pleased that we have been able to recruit Adrian Orr as Deputy Governor and Head of the new Financial Stability Department.


The heart of a nation’s commerce is its currency. The Reserve Bank has led much of the world in finding new and more effective ways to manage bank notes and coins. This has involved banks and security companies taking on more of the cash management role

For our currency function, the year under review was a period of consolidation, making sure the system works well and embedding the new polymer notes, which are more robust and harder to forge. Appropriately during the 50th anniversary of Sir Edmund Hillary’s epic climb, our main reprinting has been the $5 notes which bear his image. Meeting the currency needs of the public will continue to be a vital function and the iconic aspects of currency will continue to provide fresh challenges

Other functions of the Bank

For any visitor to the Reserve Bank, what soon becomes obvious are the “engine room” operations that help keep New Zealand’s financial systems going - massive concrete vaults holding cash reserves; computer rooms with humming boxes recording banks’ transactions of over $30 billion per day; the transaction work that keeps ESAS, Austraclear, the registry and the depository operating smoothly; knowledge management and information systems; open market operations; daily liquidity management to keep the right amount of cash in the system; ongoing market management of our $4 billion of foreign reserves; and accounting and auditing systems to keep control of all this - all telling of critical services provided reliably without fanfare or fuss.

Personnel and governance

Don Brash left the Reserve Bank in May 2002, but it would not be right to present this commentary without thanking him. Dr Brash made a very big contribution to the Reserve Bank; to price stability in New Zealand and indeed to central banking around the world, in many ways setting the standard

When Don departed it was left to Rod Carr, his deputy, to step in as Acting Governor, a role that he played extremely well, holding the organisation together and keeping it moving forward. I want to publicly thank Rod and all the other Reserve Bank staff who have helped an outsider settle in to the exacting role of Governor

Bill Wilson, outgoing Chair of the Non-Executive Directors’ Committee, deserves all our thanks for his crucial contribution to the governance of the Bank over so many years. His position has been taken over by Arthur Grimes, while Alison Paterson is Deputy Chair and Chair of the Audit Committee. Being Governor is a weighty responsibility and a privilege and I thank them, the other Directors and all those who are helping me to carry out this task.

Alan Bollard