The Reserve Bank of New Zealand (RBNZ) was established in 1934 to provide central-banking facilities and has been wholly owned by the government since 1936. The bank operates under the Reserve Bank Act.
The RBNZ has four main tasks:
- Operating monetary policy to achieve and maintain price stability
- Assisting the functioning of a sound financial system
- Meeting currency needs of the public
- Overseeing and operating an efficient payments system
Is the RBNZ Independent?
The RBNZ has full operational independence surrounding its decision making. It is, however, responsible to the government and the RBNZ Governor is required to testify to parliamentary select committees both on monetary policy and regulatory matters.
Monetary Policy Framework
The principal medium-term objective of monetary policy is to control inflation and the centre-piece of monetary policy is the Policy Targets Agreement (PTA). The PTA is negotiated between the government and Reserve Bank.
Under the current agreement signed in 2012, price stability is defined as an annual increase in the Consumer prices Index (CPI) of between 1-3% on average over the medium term with a focus on keeping future average inflation near the 2% target midpoint.
RBNZ Monetary Policy Operation
The RBNZ adjusts monetary policy in order to achieve its target of 2%. This is achieved by influencing the level of interest rates in the economy by adjusting the Official Cash Rate (OCR).
Reserve Bank of New Zealand’s Governing Committee
Any changes in monetary policy are agreed through the Governing Committee, which meets eight times per year.
The Governing Committee comprises four members; The Governor, two Deputy Governors and the Assistant Governor, although ultimate responsibility for policy decisions lies with the Governor.
The Governing Committee takes advice and guidance from internal bank departments and independent external advisers.
Following the meeting, the policy decision on the OCR and statement are released with justifications and explanations for the announced decision. Within the statement, the committee may also provide guidance on expected policy action at subsequent meetings.
Each quarter, the RBNZ will issue a Monetary Policy Statement (MPS), which provides a detailed assessment of current economic conditions together, with the prospects for inflation and output growth. This provides more detail than the usual policy statements and the RBNZ tends to be more likely to adjust policy at the meetings where a full monetary policy statement is issued.
At meetings where the MPS is issued, the Bank Governor will also hold a media conference to discuss the report with a Q&A session.
The Governor and other members of the Governing Committee make speeches during their time in office. These are important in setting out their thoughts on the economy and potential trends in interest rates, especially if prepared comments are followed by a Q&A session. Speeches from the Governor are notably important, especially when they are looking to signal a change in policy direction, although the RBNZ Governor and other officials tend to make fewer speeches than other major central banks.
The RBNZ produces the Financial Stability Report (FSR) twice per year. The FSR takes a detailed look at issues surrounding financial stability in the economy including potential vulnerabilities in the household sector as well as the financial sector. It also looks at the overall international risks to financial stability and the banking sector.
The report also produces a range of macro-prudential releases. If the RBNZ is seriously concerned surrounding the prospects for stability, it has the power to introduce direct measures on credit and lending such as loan to valuation ratio restrictions (LVRs) in order to lessen risks within the economy.
Any direct measures taken on financial stability will also have an impact on monetary policy. Tighter restrictions on lending, for example, would tend to lessen upward pressure on interest rates.
The Bank Governor holds a press conference following the FSR release to discuss key aspects of the report.
The RBNZ produces a number of economic data releases relating to credit and money, although most of the market-moving economic data is supplied by Statistics New Zealand.
The RBNZ has the power to intervene in the currency markets and either buy or sell the New Zealand dollar if it feels there is serious malfunction in market operations or that the exchange rate is substantially out of line with economic fundamentals.
The exchange rate and terms of trade are particularly sensitive issues due to the importance of the dairy industry for the New Zealand economy. Actual intervention can have a very substantial market impact when deployed and the RBNZ frequently engages in verbal intervention with rhetoric used to try and push the currency in the desired direction.