Reserve Bank releases 2010-11 Annual Report
During a year of shocks and volatility, the Reserve Bank has focused on the resilience of the New Zealand economy and financial system, while staying on top of inflationary pressures, Reserve Bank Governor Alan Bollard said today.
Releasing the Bank's 2010-2011 Annual Report, Dr Bollard said the developed world is struggling to cope with the aftermath of the global financial crisis and the very large accumulation of public and private debt in the last decade.
"It is now clear that we have a slow grind ahead, with surprises and disappointments that we cannot necessarily foresee. The Bank has been seeking to increase the resilience of the financial system, which will help reduce its vulnerability to external shocks."
The Annual Report chronicles a year marked by market volatility due to unsteady recovery in the US and ongoing sovereign debt crises in Europe, while the Canterbury earthquakes have caused significant disruption, destruction and economic uncertainty.
Offsetting this, domestic activity has been stronger than expected, and farm earnings have benefited from strong commodity prices, driven by growth in China, East Asia and Australia.
However, future inflation expectations have risen as tax changes contributed to a hefty rise in headline inflation. A very strong kiwi dollar has offset the inflationary impact to some extent.
"Overall, the Bank will need to monitor the situation carefully especially as there is now a real risk that global economic activity could slow sharply," Dr Bollard said.
The Bank reported a net profit of $144 million for the year to 30 June 2011, and paid a dividend of $210 million to the Crown.
The Annual Report notes that the Bank has continued its investigations into macro-prudential tools that may help bolster financial system resilience and moderate credit cycles, though Dr Bollard cautioned that expectations need to be realistic about what can be achieved.
Also featured in the Annual Report is the Bank's work on tighter prudential standards. These include Basel III and the implementation of capital models for housing and agriculture, recently introduced liquidity requirements, and progress on insurance regulation.
"At the same time, we have had to manage our own balance sheet to take into account big moves in the kiwi and fragility in offshore sovereign markets. Our foreign reserves benchmarking project will help us to do this in the coming year."
The Annual Report notes that, as the New Zealand currency ages and security features mature, work has started on a multi-year banknote upgrade project.
It also recognises the improvement to the Bank's ability to handle significant Wellington disruptions by using its new Auckland office disaster recovery capability.
"As the current environment demonstrates, we can expect more disruption and fragility ahead, much of it originating from offshore. We cannot predict all of this, but we can plan to be resilient through it."
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