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Annual Report 2004

Read our Governor's statement and download a PDF of our annual report for the 12 months ending 30 June 2004.

Reserve Bank of New Zealand

Governor's statement

The Reserve Bank Act requires the Bank to maintain price stability and to promote a sound and efficient financial system. Both these tasks are important for New Zealand, and hence they are the main focus of this introduction to the Reserve Bank’s 2004 Annual Report.

Monetary Policy

We are required by law to maintain price stability, and, by agreement with the Minister of Finance, to aim to keep future Consumers Price Index (CPI) inflation between 1 and 3 per cent on average over the medium term.

During the second half of 2003, the Official Cash Rate (OCR) was held at relatively low levels by New Zealand standards. However, by the end of 2003 it became clear that, contrary to most economists’ forecasts, New Zealand’s strong economic growth was not slowing. Moreover, domestic inflation remained significant. At that stage, its impact on overall CPI inflation was held in check by a very strong New Zealand dollar, but this could not be relied upon indefinitely. Therefore, in the first half of 2004, monetary policy began a tightening phase, to ensure that any future increase in inflation would be temporary. Handling the underlying strength in inflation will be the main policy challenge during the year ahead.

We have this year reviewed our thinking about the relationship between monetary policy and economic growth. To summarise, good monetary policy allows an economy to grow at its average sustainable rate, but no higher, whereas poor monetary policy can either restrict growth or trigger inflation. For the Bank, a crucial question now is calculating New Zealand’s potential growth rate, and assessing whether the high growth rates of recent years are sustainable.

It has also been a year of high and volatile exchange rates. We have done a lot of background work on exchange rate issues to help inform our monetary policy decisions. This includes a fresh look at the impact of monetary policy on the exchange rate and the effects of the exchange rate on the economy.

In the light of the pressures on the New Zealand dollar, we also reviewed our policies on foreign exchange intervention. Under our Act, we have long had intervention powers. During the review period, we gained additional capital and reserves to enable us to extend the purposes for which we might intervene. These now include supporting monetary policy by influencing the extremes of the exchange rate cycle, if ever required. We have made public some of the principles that we would apply to making and implementing a decision to intervene.

Financial Stability

The Reserve Bank Act requires us to supervise banks to promote the maintenance of a sound and efficient financial system. It has been a significant year in this area.

Among the highlights has been a major inspection of our approach to financial surveillance by the IMF Financial Sector Assessment Programme (FSAP) Team. They pronounced it broadly healthy, and made some suggestions which we are now working on.

During the year, we conditionally approved New Zealand’s biggest corporate acquisition so far – ANZ Banking Group (New Zealand) Limited’s acquisition of, and then amalgamation with, The National Bank of New Zealand Limited. This involved a very large amount of work and has provided an opportunity for us to restate our regulatory requirements for systemically important banks operating in New Zealand. As part of this, we expect that they organise their retail operations through local subsidiaries, with New Zealand boards and with chief executives who report to their New Zealand boards. An outsourcing policy is also being developed to ensure that the systemically important banks have enough technical functionality to run their core operations on a standalone basis, if necessary. Our aim is to avoid high compliance costs, and to retain our efficiency-based approach to regulation, while still ensuring that we can have control over New Zealand’s financial system should a crisis ever arise.

Westpac Banking Corporation has this year made a formal proposal to remain exempted from our requirement that systemically important banks here are locally incorporated. We are now considering the merits of their bolstered branch proposal.

All of New Zealand’s large retail banks are now Australian-owned. We have been working with The New Zealand Treasury in an endeavour to design an integrated regulatory system that takes into account Australian methods of bank regulation, while still meeting New Zealand’s particular needs. These are that we have a banking system that offers good returns to depositors and investors, meets the needs of borrowers, and can be managed effectively by the relevant New Zealand authorities, including in a crisis.

We have taken advantage of two international investment opportunities this year. The Reserve Bank has become a shareholder in the Bank for International Settlements, and we have joined East Asian nations to participate in the newly formed Asian Bond Fund.

I am also pleased to report that this year we have built up our staff resources in the financial stability area, taking on senior people with experience in commercial banking.

Other Operations

The Reserve Bank carries out numerous other functions that help keep the New Zealand financial system in good shape.

Highlights during the review period included acceptance in principle of the New Zealand dollar as a currency for the international ‘Continuous Linked Settlement (CLS)’ foreign exchange clearing system; a technology upgrade for our realtime gross settlement system; partial implementation of a decision to exit the provision of registry services; investment in a new state-of-the-art treasury system; and production of the Lord of the Rings commemorative coin series. This list shows how varied our work can be.

The Overseas Investment Commission, which is housed and staffed by the Reserve Bank, was reviewed, and on 20 July 2004 the Minister of Finance announced his intention that the Commission would be disestablished and its work done by a dedicated unit within Land Information New Zealand.


The Reserve Bank Amendment Act, passed during the review period, requires that the Reserve Bank Board elect its own non-executive chair. In September 2003, Dr Arthur Grimes was elected to that position. In December 2003, Dr Marilyn Waring was appointed to the Board, replacing the Hon Ruth Richardson whose term had expired. I wish to thank Board members for their continuing advice and support, especially Chairman Dr Arthur Grimes, and Deputy Chair and Chair of the Board Audit Committee, Mrs Alison Paterson.

Staff throughout the Bank worked enthusiastically and energetically to achieve the outcomes described in this Annual Report. I thank them all for their dedication and effort. It is a privilege to lead an institution of this calibre that is helping make the economy and the financial system work better for the benefit of all New Zealanders. I could not carry out my duties without the extensive support that I receive.

Alan Bollard