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Statement of Intent 1 July 2008 - 30 June 2011

Reserve Bank of New Zealand


For the first time in a decade, there are signs of a marked slowdown in growth in New Zealand, and the outlook is clouded with considerable uncertainty.

Over the last six months or so, the housing market, household consumption, and employment growth have softened markedly, while inflationary pressures, especially in fuel and food prices, have continued to strengthen. This change in conditions comes after a decade of uninterrupted growth in New Zealand, unprecedented in the post-War era. Strong net migration, ready access to cheap finance, a buoyant housing sector and higher terms of trade driven by dairy prices have underpinned domestic demand. Annual growth has averaged 3.1 percent over this period.

Growth has not come without challenges for an inflation-targeting central bank. Inflation has averaged 2.2 percent over this time – well within the Bank’s target of 1 to 3 percent on average over themedium term. But inflation pressures, associated with a tight labour market and overstretched capacity, have necessitated a rise in the Bank’s official cash rate (OCR) over the latter stages of this cycle. Large and sustained price increases for fuel, food and other commodities have added to these headline inflation pressures.

Since August 2007, our financial system has withstood a severe test of global financial markets, triggered initially by losses in the US sub-prime mortgage market. A range of financial institutions, including some of the world’s largest banks, have incurred substantial losses. Most have had to deal in markets where liquidity has become more scarce and, as a consequence have encountered significant liquidity pressures. Bank funding costs have lifted across the developed world, including Australia and New Zealand.

The IMF has described unfolding events as the largest financial shock since the Great Depression. The adjustment process might prove to be protracted. Further volatility in world equity markets, exchange rates, and debt markets is likely. The outlook for global growth has deteriorated, and the New Zealand economy is entering a period of slower growth, particularly evident in the housing sector.

At the same time, difficulties experienced over the past two years in parts of New Zealand’s non-bank financial sector have continued, with additional finance companies being placed into receivership.

What does all this mean for the Bank’s planning?

We have set as our first strategic priority (see page 5) to “Develop and implement a prudential liquidity policy for registered banks.” While New Zealand’s banks appear to have sufficient capital buffers to absorb the range of credit losses that can reasonably be expected over the course of the economic cycle, they are less favourably positioned if funding becomes more difficult to access in global markets. The banking system is reliant on overseas funding. It is important that banks diversify their funding sources and lengthen the maturity structure of their debt. In early May, we announced further changes to our liquidity management arrangements to ensure adequate liquidity for institutions if global market disruptions intensify.

Our second priority will see us implement the new regulatory arrangements for non-bank deposit-takers that emerged from the government’s review of the prudential overview of this sector last year. We will also develop a prudential regime for the insurance sector.

This expansion of our prudential role will require an increase in suitably qualified staff to provide policy advice and regulatory oversight. As a result, the Bank and the Minister have signed a variation to the Bank’s five-year funding agreement for 2008/09 and 2009/10 financial years to cover these establishment costs.

It is essential that our management and technical systems provide good support for our monetary and financial stability policy roles. A new model is being introduced into the monetary policy and forecasting process and an integrated computer application is being built for collecting financial sector statistics.

Across the organisation we will be developing our management competencies, further ensuring that our core values are fully integrated. For the first time, this SOI includes published ‘Key Performance Indicators’ (KPIs) for the Bank. The KPIs reflect a new requirement to demonstrate accountability by identifying the main nonfinancial measures and standards by which the performance of the Bank can be judged. These indicators will evolve as we gain experience in their usefulness.

Finally, this SOI notes a change to legislation we are seeking to enable new arrangements agreed with the Minister to provide a more holistic approach to our capital base and the way in which our annual distribution to the Crown is calculated.

Overall, this SOI reflects a strategic approach to ensure the Bank’s ability to maintain stability in an uncertain environment.

Alan Bollard

Grant Spencer
Deputy Governor