We continue to operate in a challenging external environment, both domestically and internationally. Heightened geopolitical and climate conditions remain a risk for inflation and we continue to take steps to strengthen New Zealand’s economic resilience, bolstering our ability to withstand external shocks.
Internationally, central banks are retaining policy interest rates at restrictive levels for longer to ensure that inflation targets are met. Global economic growth remains below trend. However, our restrictive monetary policy has reduced capacity pressures in the New Zealand economy and lowered consumer price inflation.
Over the course of the year, the Monetary Policy Committee (MPC) maintained the Official Cash Rate (OCR) at 5.5 percent. Decisions were made in response to the New Zealand economy evolving in line with the MPC’s expectations, with restrictive monetary policy significantly reducing consumer price inflation.
Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced. Annual consumer price inflation is expected to return to within the Committee’s 1 to 3 percent target range by the end of 2024.
We continue to focus on implementing the recommendations from the RAFIMP. We have commenced a review of the Reserve Bank’s Liquidity Management Framework. The outcomes of this review will be key to our ongoing management of financial system liquidity, both on a day-to-day basis and during crisis periods.
During the year I was delighted to welcome two new members of the MPC: Carl Hansen and Professor Prasanna Gai. Their respective business experience at a high level and research expertise on macroeconomics and monetary policy add fresh perspectives to Committee discussions. I would like to thank Peter Harris and Caroline Saunders for their significant service on the MPC, guiding monetary policy during the pandemic.
The increasing-interest-rate environment exposed some fragilities in the global financial system, particularly where risks had been inadequately managed. New Zealand households and businesses faced increased debt-servicing costs as their borrowing repriced to higher interest rates. Signs of distress in banks’ lending portfolios have increased from low levels, and the extent of further increases will depend on economic activity and the labour market.
We continue to progress significant work to intensify our regulatory framework and supervisory approach. The DTA, which contributes to a sustainable and productive economy, received Royal Assent in July 2023. A substantial multi-year work programme is now in place, with major milestones of the last year including the publication of the Proportionality Framework, development of standards, and consultations on core standards and features of the DCS.
As of 1 March 2024, we now have a legal framework that enables us to more comprehensively oversee the financial market infrastructures (FMI) sector and thereby contribute to financial stability. We have now issued all five designation notices to systemically important FMIs and continued to work on the Guidance Note for Designation.
Major banks completed their implementation of our Outsourcing Policy BS11. This means they now have in place the legal and practical ability to control and execute outsourced functions. Considerable work over several years was involved in the full implementation of BS11, and this is a huge development for the stability of New Zealand’s banking sector.
Our review of our insurance legislation continues, and we have published a new Interim Solvency Standard to support the maintenance of a sound and efficient insurance sector and to promote public confidence in the insurance sector.
Over the past year, a focus of the Reserve Bank has been on improving outcomes to facilitate our vision of a trusted, inclusive, resilient and competitive financial system. Through our role as the prudential regulator of the financial system, we have collaborated with stakeholders such as the Council of Financial Regulators to promote innovation in the payments sector. We also made a submission to the Commerce Commission on open banking, providing an analysis and recommendations on competition and the current market structure.
We published our Approach to Financial Inclusion, outlining the steps we are taking to consider and contribute to access to financial products and services in New Zealand, and hosted the first in-person symposium for the Central Bank Network for Indigenous Inclusion (CBNII) Network in Auckland. CBNII’s theme for 2024 is building a critical mass of indigenous representation in member central banks, which we are also seeking to uplift through our Workforce Strategy.
Later this year, we will publish our first climate-related financial disclosure, separate to this annual report. The disclosure will set out the work we are doing to address climate-related risks relating to our three objectives and, where aligned with our objectives, how we are supporting the transition to a climate-resilient, low-emissions economy.
We recently published our new SOI and SPE, which reflect our ongoing work to evolve and develop as an organisation. These key corporate documents keep us accountable and transparent, clearly showing what we are setting out to achieve as kaitiaki of the financial system and how we are delivering results for New Zealanders.
The centrepiece of our SOI is our strategy, featuring our six strategic themes. The SPE reflects our refreshed performance framework, how we assess and measure our annual output classes, and their contribution to our strategic themes and outcomes. Over the next few years, as we continue to develop as an organisation, we will also evolve how we assess and report on our achievement against our strategic themes, outcomes and key activities.
This past year we have commenced the development of a workforce strategy and continued to embed our information and data management strategy. We have also updated our Te Ao Māori strategy – Te Waka Hourua – providing guidance for how we will help support our workforce, promote inclusion, further enable Māori economic development, and strengthen our relationships with Māori.
I am proud of all the work my colleagues at the Reserve Bank have undertaken throughout the year, and look forward to continuing towards our vision of an inclusive, trusted and resilient financial system.
Finally, I wish to express great appreciation for the support and insight provided by my Reserve Bank Board colleagues.The Bank’s management benefits significantly from the efforts of the Board.
Adrian Orr
Governor
26 September 2024