Introduction
This Briefing provides an introduction to the policy responsibilities and activities of the Reserve Bank.
It is organised into four chapters.
Chapter one summarises the Bank’s broad mandate as established by the Reserve Bank of New Zealand Act 1989, and outlines the institutional structures within which that mandate is carried out. The Bank operates under governance arrangements that have been tailored specifically to provide the Governor of the Bank with a large measure of operational independence, but within broad policy parameters that have been prescribed in statute and/or are subject to ministerial agreement. Additionally, the Bank is subject to a number of accountability mechanisms. These involve the Bank’s Board of Directors, the Minister, Parliament and the public.
The remaining three chapters are organised around the functions that the Bank performs to discharge the responsibilities that have been assigned to it.
Chapters two and three deal, respectively, with:
- monetary policy, which is directed to maintaining stability in the general level of prices; and
- oversight of the financial system, which is directed to maintaining the stability of the financial system, or avoiding significant damage to the financial system that could result from the failure of a registered bank.
Each of these chapters begins with an outline of the statutory framework for the function, with a particular focus on how the objectives and respective roles and responsibilities of the Minister and of the Governor are defined in the Reserve Bank Act. We then discuss the policy issues that pertain to each function.
In the case of monetary policy, our point of departure is a review of the performance of the New Zealand economy, and consideration of the place of monetary policy in promoting growth. Central to that role is the maintenance of price stability, and the inflation targeting framework under which the Bank pursues that objective.
We also discuss, however, how that inflation targeting framework has evolved since its formalisation in the Reserve Bank Act a decade ago. The key element in that evolution, as inflation has become increasingly well anchored, has been a shift toward targeting inflation in a more medium-term context. This evolution has resulted in more attention being given to achieving a balance between inflation stability on the one hand and stability in interest rates, the exchange rate and real economic activity on the other.
The issues in the area of financial system oversight mostly have an international dimension. The local banking system is presently one of the strongest in the world.
The international dimension stems from a number of things. First, the fact that New Zealand’s financial institutions are mainly foreign owned, and increasingly operated and managed from offshore, means that we need to keep well informed about banking and regulatory developments in their home countries.
Secondly, one of the international policy responses to the financial crises in emerging markets in recent years has been further codification of international standards for bank supervision and related matters. Our approach to bank supervision, which stresses market discipline, public disclosure and good governance, is directed to many of the same goals as those which the standards seek to achieve. However, in some areas we seek to achieve these goals in a somewhat different way, creating a need for us to work to ensure that our approach is adequately accommodated by the international standards.
Thirdly, one area of banking where a substantial reduction in risks can be achieved is in banks’ settlements of their foreign exchange transactions. The volume of these settlements is very large, and they involve interbank risks which can last for some days at a time. International initiatives are under way to reduce these risks, and we are keenly pursuing opportunities for New Zealand to be included as soon as possible.
The fourth chapter of the Briefing outlines a number of other functions performed by the Reserve Bank. These have varying degrees of connection with the two main functions already mentioned. They range from responsibility for issuing notes and coins, which is core to our role as a central bank, through to providing the secretariat for the Overseas Investment Commission, which is a more peripheral role.