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Statement of Intent 1 July 2016 - 30 June 2019

Reserve Bank of New Zealand

Environmental setting

New Zealand’s economy expanded at an average rate of 2.3 percent in 2015, in line with the average pace of expansion since 2010. The economic expansion has been supported by a low policy interest rate, high house price inflation, strong inward migration, continued construction growth and a decline in the exchange rate since April 2015.

However, the economy faces a number of headwinds, including low export commodity prices, particularly in the dairy sector, weak world demand and a cautious household sector.

Inflation has remained below the target band of 1-3 percent during 2015 – driven by an elevated exchange rate, falls in oil prices and spare capacity in the global economy. Stronger-than-expected growth in labour supply has also contributed to lower inflation.

The outlook for the global economy remains highly uncertain, which has led to some volatility in financial markets. Economic growth is slowing in a number of key trading partner economies and international commodity prices remain weak. Central banks around the world continue to adopt unprecedented monetary policy stimulus in response to low inflation, and this poses a risk for financial stability by encouraging higher leverage, risk-taking and driving up asset prices. The Reserve Bank will continue to deepen its understanding of the current drivers of low inflation and their consequences for the economy and monetary policy.

The Reserve Bank will continue to draw on the flexibility contained in the Policy Targets Agreement in managing economic risks and assessing monetary policy. While there has been a material decline in short-term inflation expectations, and Consumer Price Index (CPI) outturns have been outside the Bank’s 1-3 percent target band, long-term inflation expectations are well-anchored at 2 percent.

From a financial stability perspective, New Zealand’s financial system remains sound and well placed to support economic expansion. New Zealand banks are well capitalised, funding and liquidity buffers are above required minimums, and profitability is strong. While banks have capacity to absorb an increase in problem loans, sustained increases in house prices, and the risk of a sharp correction, could pose additional financial stability risks.

The Bank continually seeks to strengthen its performance and position itself to meet the challenges and demands of the surrounding environment. The Bank’s Funding Agreement with the Minister of Finance allows for a funding increase of 1 percent a year over the next five years. Cost savings and resource efficiencies have been identified and are being implemented.

Strategic priorities

We are working to position the Bank to best face the challenges ahead, and the strategic priorities in the Statement of Intent (SOI) reflect this. The Bank has adopted eight strategic priorities for 2016-19 to enhance its capacity to respond to this challenging environment. Many of these strategic priorities run across several functions and departments.

These strategic priorities, which are described in more detail on pages 13-15, are framed around three broad themes:

  • enhancing the Bank’s policy frameworks;
  • continuing to strengthen the Bank’s internal and external engagement; and
  • improving infrastructure and reducing enterprise risk.

Informing Government

The Bank keeps the Minister of Finance regularly informed about its thinking on significant policy developments, especially where Cabinet decisions, legislation or regulation may be required. This involves providing substantive information on and a discussion of the rationale for any changes and their potential economic and fiscal impacts at the earliest possible stages of policy development, including timely engagement with Treasury officials. The Bank also provides assessments of the expected regulatory impacts of proposed policy developments.

In terms of the 2016-19 SOI, this would include information on:

  • macroeconomic policy in the coming economic cycle, including the implications of low inflation and how international monetary conditions may affect the exchange rate and domestic policy settings. It also covers issues relating to the Bank’s implementation of monetary policy and policies directed toward financial stability and their interactions with fiscal and wider policy settings, as well as analytical contributions that deepen understanding of New Zealand’s economic performance and macroeconomic imbalances;
  • macro-prudential policy and the effectiveness and development of macro-prudential tools, and consultation on developments in accordance with the Memorandum of Understanding agreed in 2013;
    plans to improve the quality and effectiveness of the regulatory and prudential supervisory regimes administered by the Bank;
  • activities that support a well functioning financial system, including the ongoing suitability of policies that reduce the likelihood of the failure of a major financial institution in New Zealand, particularly in light of ongoing international developments in prudential standards;
  • risks to the Crown balance sheet that may arise from the failure of a financial institution and the bedding in of reforms that mitigate the Crown’s exposure to the financial sector, including Open Bank Resolution (OBR); and
  • the scope and outcomes of the Bank’s close ongoing collaboration with Australian stakeholders through the Trans-Tasman Banking Council and other channels.
    advice on any amendments or updates to the Policy Targets Agreement which will be signed by the Reserve Bank Governor and Minister of Finance in 2017.

Graeme Wheeler

Grant Spencer
Deputy Governor

21 June 2016