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Statement of Intent 1 July 2004 - 30 June 2007

Reserve Bank of New Zealand

Governor’s Statement

The Reserve Bank of New Zealand has changed over the years, but the Bank is still focused on its traditional role of preserving value in a modern economy. We do this by producing currency, preserving its domestic purchasing power, stabilising nominal economic activity through monetary policy, bank regulation, and helping exchange through the oversight of payments and settlements systems.

For many years we have been a world leader in new central bank practice. While we expect to stay at the forefront of central bank thinking, there is enough innovation going on in other central banks for us to learn much from their experiences.

For many years eliminating New Zealand’s high inflation was the dominant objective of the Reserve Bank. However, with that objective achieved, the economy, expectations, and business practices are changing. As a result, we still view keeping inflation expectations low as very important, but with stable inflation we can now apply more attention to financial systems, to banking, to exchange rates, and to trans-Tasman issues.

These developments will occupy a lot more of our attention for the next few years. A few examples are as follows:

  • With price stability, exchange rate variability has become more evident and continues to be a major challenge when carrying out monetary policy.
  • The “Australianisation” of the banking system has meant we need to reassess the way we supervise banks and our contingency plans for crisis management.
  • Technical developments in financial flows mean we need to pay attention to the regulation of payments and settlements.
  • Our “silver” coinage is costly and starting to look old-fashioned, and needs rethinking.

Over the last few years, the Reserve Bank has been through considerable downsizing and restructuring. Big challenges for the year ahead are to:

  • reinvigorate our financial system surveillance function;
  • deal with some issues that are specific to systemically important banks and to crisis management;
  • set up satisfactory processes for foreign exchange intervention;
  • introduce a new treasury system for the Reserve Bank; and
  • organise ourselves internally to handle the New Zealand dollar’s entry into Continuous Linked Settlement Bank.

Some of this work will spill over into future years. This also means a renewed focus on the Reserve Bank’s capabilities. Some of our infrastructure is looking dated and needs reinvestment. We will require a few more staff for the additional work that we are handling, and we have been targeting a broader skill set, including commercial bank experience. To help get the best out of all of this, we plan to pay more attention to developing our management skills.

Much of our work is business as usual, but the focus on reinvigorating certain functions and systems means we will have to look closely at resources and their use. The Funding Agreement over the last five years has been based on achieving expenditure reductions from rationalisation. The scope for achieving significant savings as a result of rationalisation is reduced, and we are now planning limited expenditure increases, consistent with the increased scope of our activities and reinvestment in critical systems.

Alan Bollard