Foreword
The global economic and financial landscape has become more complex, and is still vulnerable and unpredictable. The Reserve Bank is committed in several fields to supporting monetary and financial stability.
The inflation outlook is currently subdued. Domestic activity has been supported by strong farm incomes, dampened somewhat until recently by the elevated exchange rate. Housing sector activity has picked up, albeit from an historically very low base.
New Zealand’s economic prospects will be heavily affected by developments in global funding markets; the demand for our exports in the US, Asia and Australia; and the pace of rebuild in Christchurch. The degree to which these developments impact on our key trading partners, and especially on commodity prices, will be of key importance to New Zealand.
The Bank will keep price stability as its primary goal in navigating through this new environment. However, we are aware that familiar landmarks may have shifted; landmarks such as potential growth, ‘neutral’ real interest rates, the sustainable level of the exchange rate, long-run unemployment levels, and private sector debt ratios. The Bank will explore this shifting territory and ensure that monetary and macroprudential policies are calibrated accordingly.
We will also seek to understand the next business cycle in the context of earthquakes, fiscal consolidation and international developments.
Financial system stability in New Zealand has improved since late last year. Bank funding channels have been reassured and financial market sentiment has improved. However, the problems in Europe have not gone away and financial markets remain jittery. Banks continue to face higher funding costs and limited access to some sources of funding. While this slows credit and economic growth, there is a better chance it will be sustainable growth, as governments, businesses and households look to strengthen their balance sheets.
The interface between monetary and macro-financial policies has attracted a great deal of attention since the global financial crisis. Global experience in the use of macro-prudential instruments is still limited, and the Bank is continuing to develop a framework for implementing macro-prudential policy tools in New Zealand.
At the micro-prudential level, New Zealand banks all now have significant buffers above minimum core funding requirements and have met the vast majority of their 2012 funding needs. Their problem-loan levels have declined, improving profitability.
However, the global economic crises and Canterbury earthquakes have heightened risks to the balance sheets of financial institutions. The Bank is therefore progressing work to improve banks’ capital requirements in line with Basel III; provide a legislative framework for covered bonds; and ensure banks are pre-positioned for Open Bank Resolution, which would provide for the prompt resolution of a failure.
The non-bank sectors are also now more closely regulated against the risks of failure. Non-bank deposit takers must now comply with new prudential standards and the Non-bank Deposit Takers Bill is expected to be passed in 2012, introducing further prudential requirements. All insurers are now required to be licensed and supervised by the Bank.
Should conditions deteriorate severely, the Bank is well placed to provide liquidity facilities for New Zealand banks. We will take the opportunity during 2012 to review access to, and the operation of, the Bank’s domestic markets facilities, to ensure they meet policy objectives and the needs of the financial system in the new Basel III environment.
The Bank has established a market operations office in Auckland for both business-as-usual and business continuity purposes.
The Bank itself faces a wide range of risks, some general and others unique to central banks. The identification and management of these risks is key to maintaining a sound and dynamic monetary and financial system. We will implement a new operating model for our own risk management and assurance.
The Bank is funded by way of a five-year Funding Agreement with government, extending from 2010–11 to 2014–15. The Bank’s budget for 2012–13 shows net operating expenditure of $50.0 million, $2.7 million less than the amount specified in the Bank’s funding agreement for that year. This budget allows for continuation of the banknote upgrade and additional depreciation and support costs associated with new hardware for the payment systems.
A new Governor is due to be appointed to assume the role for a five-year term from 26 September 2012.
Alan Bollard
Governor
Grant Spencer
Deputy Governor
22 May 2012