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Statement of Intent 1 July 2009 - 30 June 2012

Reserve Bank of New Zealand


We have prepared this Statement of Intent in the aftermath of a series of global financial shocks that have shaken confidence in markets, severely disrupted pricing and trading, destroying vast amounts of wealth, and making credit difficult and more expensive to access. The loss of confidence and subsequent credit crunch have stalled trade and production in many economies, sinking many into recession. The shocks have drawn unprecedented policy responses from governments and central banks.

When this financial crisis hit, New Zealand was already in a shallow recession, caused by drought and a correction in housing and consumption brought on by higher petrol prices and interest rates. Nevertheless, we have got off remarkably lightly so far compared with larger Northern Hemisphere economies. We have lowered the Official Cash Rate 575 basis points to 2.5 percent, its lowest level ever; we have expanded liquidity facilities; Government has offered guarantees on retail deposits in financial institutions and on wholesale funding. But we have been spared the necessity of zero interest rates, massive capital injections to shore up banks and companies, and unorthodox quantitative easing measures that have occurred particularly in the US and Britain.

Nevertheless, financial aftershocks still rock our markets, with New Zealand dollar investments swinging in and out of favour by the day as market appetite for risk fluctuates.

The New Zealand economy has been under pressure from the international crisis, global recession and weak domestic spending. Global credit supplies have contracted, heightening risks associated with New Zealand’s reliance on external funding. Highly leveraged households and firms are having to adjust to falling housing and other asset prices. Banks are needing to make provision for more impaired loans, but at the same time play an important role in New Zealand’s recovery by passing on recent OCR cuts into short-term lending rates. How long recovery will take is uncertain, though it is likely that it will be some significant time before economic activity returns to robust and healthy levels.

Moreover, the world is now being swept by influenza A H1N1 09. It looks likely this will impact the economy by hitting staffing, through sickness, childcare and precautionary behaviour. If the incidence is severe, it would delay recovery. Meantime, the Bank is ensuring that it can maintain its operations if the virus escalates.

In these volatile and uncertain circumstances, we have re-set some of our Strategic Priorities to ensure outcomes that we would take for granted in normal times: that our markets can still deliver sufficient funding to the economy; that our banks have adequate capital. To casual observers, our primary objective of maintaining price stability may seem the least of our concerns in the current climate, but an enormous challenge looms in the inflationary risks once confidence returns to normal in global markets when there is so much liquidity around. We will be focused on these risks as we consider the likely nature of a recovery.

Although stabilisation is our pressing need at present, we have not lost sight of the need to press on with enhancements to our roles and our tools. We will develop and implement the new regulatory framework for non-bank deposit takers and insurance companies. We will be upgrading our statistical data collection systems.

And, coincidentally, we will establish a small Auckland office to provide backup for essential payments and financial markets operations in the event of a physical disaster in Wellington.

We also want to ensure that the right staff are doing the right work, that they remain focused and motivated, and that they have the opportunity to continue to develop their skills and knowledge.

Under legislative changes enacted last year, we are now required to include key performance indicators (KPIs) in our SOI. Last year we voluntarily included KPIs for our external functions to provide us with experience in setting indicators that could be measured meaningfully. Most of those initial KPIs have stood the test and are included again in this SOI. We note that the quarterly Monetary Policy Statement and six-monthly Financial Stability Report are already required by statute as accountability documents.

The SOI covers a three-year period which overlaps the final year of the current five-year Funding Agreement, which expires at 30 June 2010, and the first two years of the next Funding Agreement, which has yet to be negotiated with the Minister of Finance.

The Bank’s budget for 2009–10 shows an increase in operating expenditure from $52.1 million to $55.1 million, primarily reflecting the expansion of the Bank’s regulatory responsibilities for non-bank financial institutions, the costs of establishing a new office in Auckland, and depreciation of new systems.

As a financial institution with approximately $29 billion in assets, the Bank faces a wide range of financial risks. The global financial crisis has significantly affected exchange rates and interest rates. This has resulted in large changes to our projected interest income and to the values of our foreign currency assets and liabilities and holdings of New Zealand government securities. The open foreign exchange position in particular will cause increased volatility in the Bank’s financial performance and financial position.

The Reserve Bank of New Zealand Amendment Act 2008 changed the framework governing payment by the Bank of an annual dividend to the Crown. It changed the regime from a formula-based approach (i.e., the Act previously contained the formula, known as ‘notional surplus income’, for calculating the annual dividend the Bank recommended to the Minister each year) to a principles-based approach.

Overall, this SOI reflects the Bank’s continuing strategy of endeavouring to ensure stability in New Zealand’s financial system and economy despite an uncertain environment.

Alan Bollard

Grant Spencer
Deputy Governor