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Statement of Intent 1 July 2012 - 30 June 2015

Reserve Bank of New Zealand


The theme of ‘recovery’, albeit with an additional set of events, continues to be at the forefront of New Zealand’s economic challenges. The Bank’s primary challenge is to balance the appropriate responses and use the necessary tools to maintain price stability in the context of a robust and growing economy.

The Christchurch earthquake in February 2011 resulted in significant loss and trauma, compounding the effects of the September 2010 earthquake and subsequent aftershocks. In addition to the considerable impact on people’s lives and immediate economic disruption, the earthquake will have a considerable impact on the New Zealand economy for years to come.

The economic impacts of such events are complex and significant. Understanding the inflation implications and designing monetary policy appropriate for the scale of rebuilding required in Christchurch will be especially challenging. The earthquake does not appear to have impacted bank balance sheets much, but it has stressed one significant insurance company (AMI) and we will continue to monitor this sector closely through the new regulatory framework that the Bank is currently putting in place.

Internationally, much of the world is still in recovery from the Global Financial Crisis. That is posing problems for some heavily indebted countries and sovereign debt markets. The ability of major economies – the US, the UK and Japan particularly – to recover domestically and address their own debt issues will be crucial for us.

At the same time, we expect the New Zealand economy to be driven by continued growth in our East Asia and Australian trading partners. Related to this, high commodity prices have become an important engine of growth, but we expect price volatility will pose challenges for monetary policy. Oil and food price rises fuelled by international political instability, along with global demand growth and supply disruptions, are starting to cause significant international inflation concerns.

Domestically, New Zealand households and businesses are behaving much more cautiously than before the Global Financial Crisis. This is slowing recovery, but is laying the groundwork for a more resilient economy for the future.

With the earthquake and fragile international sovereign debt markets, the government’s fiscal burden is significantly tougher and that may have implications for monetary policy.

On a broader canvas, again coloured by experiences of the Global Financial Crisis, we will be considering the inter-relationship between monetary policy and potential macro-prudential policy tools to promote greater financial and macro stability. In particular, we need to understand the impact of such policies in mitigating credit booms and increasing the resilience of the financial system. Our experiences during the crisis, and changes to the financial market environment since, have also led us to review how we might improve the management of our foreign reserves, including introducing new improved benchmarks for our reserves portfolios.

The slower domestic recovery is assisting financial stability, by gradually improving New Zealand’s significant external and financial imbalances. Banks’ balance sheets have recovered, although funding conditions are still challenging.

Our prudential supervisory teams have a lot to do calibrating and fine-tuning regulatory requirements from Basel III, open bank resolution, capital levels for agricultural lending, and liquidity requirements. This will include trans-Tasman stress tests. We are also looking into bank efficiency in New Zealand and comparisons with overseas.

Non-bank deposit takers have been a declining sector, but we hope to see some healthy growth in a more regulated form to help meet New Zealand’s development needs. We will also be commencing a licensing regime for New Zealand’s insurance industry.

The post-Global Financial Crisis environment has provided lessons for the way we manage the Bank’s foreign reserves and payment systems. To help us manage our foreign reserves more effectively, we will use a new approach for asset allocation and performance benchmarking.

The banking industry is changing retail payments processing by introducing ‘Settlement Before Interchange’. Associated changes required by the Bank will assist in the management of retail settlement risk should a payments system participant default. Development of wholesale payment and settlement systems will help bolster the resilience of our financial system. Our regulatory oversight will cover several major systems, including the NZX’s new central counterparty clearing system.

Our systems are being reinforced in the event of an emergency by bringing the new Auckland office into operation.

The next few years will see the development of a new series of banknotes designed to take advantage of new high-tech security features.

Our staff’s capability makes a critical contribution to the Bank’s overall success in fulfilling its full range of expanded functions. We will be using a variety of tools to develop our staff’s cross-functional capabilities and knowledge.

This SOI appears at the start of the second year of a five-year Funding Agreement between the Bank and the government, extending from 2010–11 to 2014–15. The agreement was developed in an environment where central government expected its agencies to have strong expenditure control and to minimise growth in operating costs. The Bank’s budget for 2011–12 shows net operating expenditure of $48.8 million, $1.4 million less than the amount specified in the Bank’s funding agreement for that year.

This budget will enable us to focus on finalising implementation of our new regulatory and supervision areas, completing information technology upgrades and the initial work on the introduction of a new series of bank notes, although much of this latter cost will fall after 2015.

We operate in an ever-changing and challenging environment. A year ago, we were emerging from the worst financial crisis in more than 70 years. We could not foresee that, a year later, New Zealand would be rebuilding from its worst natural disaster in 80 years. The Bank, a feature of our economic landscape for 76 years, is committed to making its contribution to the economic and financial stability necessary for recovery and prosperity.

Alan Bollard

Grant Spencer
Deputy Governor