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Briefing to the Incoming Minister 2014

Reserve Bank of New Zealand

Overview of the Reserve Bank of New Zealand

The Reserve Bank manages monetary policy to maintain price stability, promotes the maintenance of a sound and efficient financial system, and supplies New Zealand banknotes and coins.

Role and accountability

  • The Bank is a Crown agency that contributes to the Government's goal of improving New Zealand's economic performance by targeting three outcomes. These are designed to foster confidence and stability in New Zealand's financial system by:
    • Maintaining stability in the general level of prices. Maintaining a sound and efficient financial system.
    • Providing legal tender to meet the currency needs of the public.
  • To achieve these outcomes, the Bank's functions cover: monetary policy formulation; financial market operations; macro-financial stability; prudential supervision; settlement services; and currency operations. These functions, the outcomes that the Bank targets, and the measures used to evaluate performance are described in the Bank's Annual Report, copies of which have been forwarded to your Office.
  • A chart is contained (pages 17-22), detailing the significant powers and responsibilities of the Minister of Finance, the Reserve Bank, and the Reserve Bank Board, under the Reserve Bank Act 1989, the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, the Insurance (Prudential Supervision) Act 2010, and the Non-Bank Deposit Takers Act 2013.
  • Section 9 of the RBNZ Act requires that the Minister shall fix, in agreement with the Governor, policy targets for monetary policy. This is required whenever a Governor is re/appointed. Also, the Minister and Governor may "from time to time" review or alter the PTA. Any alterations must be recorded, tabled at the Board, and gazetted.
  • The Reserve Bank endeavours to keep the Minister and the Treasury informed about its views on the economic outlook, policy developments and other significant matters affecting the Bank. We provide regular briefings focused on the broader economy ahead of each Monetary Policy Statement. We also meet regularly with the Minister and Treasury, providing information and seeking the Minister's input, on proposed regulatory policy developments. Under the Memorandum of Understanding on Macro-Prudential Policy, the Bank is required to keep the Minister and Treasury informed about our thinking on macro-prudential policy developments, and to consult the Minister prior to any decision to deploy macro-prudential policy instruments.

Governance and funding

  • In February 2013, the Bank established a Governing Committee, comprising the four governors. This committee discusses the major monetary and financial policy decisions falling under the Bank's responsibilities.
  • The Bank has a Five-year Funding Agreement. The current Funding Agreement covers the five-year period ending 30 June 2015, and provides funding of $56.4 million for 2014/15. Preparation of a new Funding Agreement, covering the period 1 July 2015 - 30 June 2020, is underway.

Environment and live issues

Monetary and macro-prudential policies

  • In many respects, the economy is performing well. The economic expansion is in its fifth year, real Gross Domestic Product is currently growing at an annual rate of around 3.5 percent, the unemployment rate is falling, and inflation remains low. Labour force participation is at historically high levels, and consumer and business confidence is robust. The main challenge is to ensure that the recovery can be sustained, and the price stability goal is achieved. House prices and the real exchange rate are overvalued and the Bank's forecasts show a significant deterioration in the current account.
  • Financial stability considerations associated with the overvalued housing market became a major policy concern in 2013, with house prices high by international standards. In September 2013, the Bank increased the capital risk weights on banks' high loan-to­ value mortgage lending (to borrowers with less than a 20 percent deposit). It also introduced macro-prudential policy in the form of a 'speed limit' on the amount of high loan-to-value ratio (LVR) lending by banks.
  • In March 2014, the Bank raised interest rates - the first central bank among the advanced economies to raise rates in the current cycle. The Bank has since raised the Official Cash Rate three further times for a total of 100 basis points to 3.5 percent.
  • The Bank's experience with macro-prudential policy has been positive, particularly in light of the unanticipated strength of net migration and the associated demand for housing. Macro-prudential policy has played a useful role in dampening a build-up in financial system risk, has helped to lower house price inflation, and supported monetary policy. There has been limited financial disintermediation. The Bank is continuing to research the relationship between macro-prudential and monetary policies.

Prudential supervision and regulation

  • The Bank recently started work on a Regulatory Stocktake project, to ensure the consistency, clarity, and efficiency of the existing stock of prudential regulations applying to banks and non-bank deposit takers (NBDTs). The project will also identify any improvements that can be made to the current processes for introducing or amending these prudential regulations.
  • Three years ago, the Government gave the Bank added responsibility for the regulation and supervision of insurance institutions. During the past year, the Bank completed its licensing of more than 100 insurance companies, and is finalising its risk-based supervisory framework.
  • Regulatory staff recently commenced a review of the prudential regulation of banks and non-bank deposit takers. Its aim is to improve the efficiency, clarity and consistency of prudential measures. A review of the prudential regime for Non-bank Deposit Takers was completed last year, recommending technical changes to improve this specific regime.
  • A comprehensive framework for stress testing the credit portfolio of New Zealand's domestically-owned banks is currently under development. [Withheld, OIA section 9(2}(f}(iv)]
  • A review of the Bank's powers in respect of the payments system is underway, with a view to strengthening the Bank's oversight of financial market infrastructures.

Other key Reserve Bank initiatives

  • To enhance the security of New Zealand's banknotes, the Bank plans to launch a new series of polymer banknotes in the fourth quarter of 2015. Improvements include greater complexity and security features in the transparent windows, as well as colour changing and optically variable features. The Bank expects to publicly release the 'near final' bank note designs in November this year.
  • The currency function also has a preparedness project underway, to ensure that the security, safety and operational efficiency of the cash operations are not compromised by the release of the new banknotes.
  • A review of the payments system infrastructure is underway, led by the Bank's settlement services function, aimed at developing a roadmap for the systems prior to undertaking major technology investment.
  • In 2013, the Bank doubled the number of on-the-record speeches given and expanded the geographical spread of the 100 off-the-record addresses it provides, on top of its suite of formal regular communications. It has also introduced a regular comprehensive stakeholder engagement survey to provide a measure of stakeholders' familiarity with and trust in the Bank.