Foreword
When mapping our strategic priorities for this three-year SOI, we have set out to ensure that the Bank can deliver on its policy and operational goals in the face of significant change.
At the start of the Bank’s current Five-Year Funding Agreement in July 2005, it was not envisaged that the economy would have grown as strongly as it has in the last two years, delivering the longest period of growth since 1968-75 and the lowest unemployment rate in 20 years. World demand and persistently high commodity prices, especially for dairy, are key drivers of this growth.
At the same time, there has been unprecedented access to international credit, from the savings of Asian and oil-producing economies. There have also been worldwide booms in housing and oil prices.
The outcomes have surprised forecasters. There have been large international exchange rate swings. The New Zealand dollar has recorded post-float highs. Job and income security, ready access to credit, and other factors have meant New Zealand households have taken to borrowing, investing in houses and general consumption to an extent never seen before. Our current account deficit with the rest of the world has deepened as export earnings have struggled to keep up with the growth in demand for imports.
It is now apparent that the downturn we would have expected at the end of a business cycle has been more benign than usual. New Zealand has stepped into its next growth cycle with less restructuring of balance sheets and shedding of debt and risks than we would normally have seen. The cycle has started with housing inflation still high, posing a significant risk of continued borrowing and consumption by households.
As our environment changes around us, the Bank must adapt, and that means investing in people and tools to enhance our ability to perform in that changed environment. This is most evident in our two key policy functions: Monetary Policy Formulation and Financial System Surveillance and Policy.
In these circumstances, it is critical that we continue to invest in upgrading our forecasting and policy tools, improve our understanding of household balance sheets, and improve the quality of our statistics. We have also reviewed and offered advice to Government on whether other tools could assist us in managing inflation.
While our monitoring of banks indicates their risks are well managed, we have expressed concern about the growth of their lending to the household sector, and the ultimate risk this could present to the financial system. As this SOI demonstrates, we are strengthening our analysis of risk in the financial sector. And we are participating in a government review of regulation of deposit-taking and other financial institutions.
Our role in the financial system requires investment in development and maintenance of systems that other parts of the Bank and the banking sector rely on. Our programme of renewal outlined in the Funding Agreement continues in this SOI: back-office systems that support the Bank’s functions, such as the payments system, forecasting and data systems, web capability, financial reporting, and document management. We continue to upgrade our business continuity planning.
Almost all of this type of investment, reported in our SOI and Annual Report, goes on behind the scenes. Without it, we would do our job less effectively.
The Bank’s Vision Statement, after recent review, states that “We promote a sound and dynamic monetary and financial system”. We are committed to achieving this vision through our values of Integrity, Innovation and Inclusion. Such commitment will support the Bank in delivering its policy and operational goals in the face of challenging conditions.
Alan Bollard
Governor
Grant Spencer
Deputy Governor
11 June 2007