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Role of the New Zealand Reserve Bank

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Role of the New Zealand Reserve Bank

The Reserve Bank of New Zealand’s Role and Polices.


The 1980’s saw some major changes for New Zealand, but none as significant as the deregulation of the financial institutions and economic policy undertaken by the Labour government. The trigger for these changes occurred in 1984 whilst the country was still under the National party control. The economy was in a bad way, with inflation high, foreign debt through the roof, and the subsequent lack of equity left in the country. The National, ruled under Robert Muldoon, called a snap election, which lead to the Labour party taking control of the country. The new Prime Minister, David Lange, immediately froze the foreign exchange market due to the major flow of currency out of the country, caused by speculation of the New Zealand dollar being devalued. Five later the exchange was reopened with the New Zealand dollar being devalued by 20 cents. This first major reform conducted by the newly elected government was to be just one of many carried out during the deregulation of the next eight months. By March 1985 a number of reforms had been passed by government to help save the economy and bring it in line with other modern economies and financial systems throughout the world. These reforms included the removal of interest rate controls, removal of the limit on interest paid to savings accounts (previously 3%), removal of the 30-day rule (a rule for trading banks, halting them from paying interest on money deposited for less than 30 days), removal of the special position given to a number of dealers on the short term money market, removal of the limitations placed interest rates and maturity for off shore borrowings, reduction in boarder controls, and the floating of the New Zealand dollar on the exchange market. Perhaps the most important changes made, however, were the reforms of the Reserve Banks monetary policies (Spencer, 1990)(Spencer & Carey, 1988)(Peare, 1999).

In 1986 the reforms, by the Labour party, of the New Zealand banking system began with expansion of the financial system to incorporate new domestic and foreign banks, with no limits placed of the number of new banks allowed. As well as leading to a more competitive banking system, it also lead to an increase in the powers of supervision allocated to the Reserve Bank, and a decrease in its ability to interfere with the financial system. The Reserve Bank of New Zealand Act 1989 was implemented in 1990 to direct the Reserve Bank to maintain inflation to an acceptable level determined by the both the Minister of Finance and the Governor of the Reserve Bank. The inflation targets were designed to achieve price stability in the marketplace. Other functions required of the Reserve Bank were also stated in the 1989 Act. These included currency issuing, New Zealand foreign reserve management, strict adherence to exchange rate policy, to be a last resort lender and a settlement bank to the financial system, provide banking services for the government, policy advice for the financial sector, providing advice on exchange rate policy, and commercial registry operation. Since the 1989 Act, sustainable growth has been added as a requirement of the Reserve Bank. This sustainable growth had to be achieved in conjunction with the existing monetary policy, plus the requirement for price stability. Sustainable growth was introduced by the 1996 coalition government and included expanding the inflation target rate to 0-3%. In February 1999 the Reserve Bank was given responsibility of setting the wholesale interest rates. This allowed the Reserve Bank to set overnight interest rate targets, otherwise known as the Official Cash Rate. The allowance of the Reserve Bank being able to set interest rates allows for the bank to have substantial sway over the short-term interest rates, and subsequently, the monetary conditions (Peare, 1999)(Reserve Bank of New Zealand, 2002).

It should now be obvious that the Reserve Bank and its policy is an ever-evolving creature, constantly adapting itself to fit the current world financial and social situation. By following the history, and thus, the evolution of the modern Reserve Bank, as written above, we can now make some firm statements about the role of the Reserve Bank of New Zealand. The Reserve Bank also currently acts as the last resort lender to the financial market, offering money when it is not available elsewhere. It also acts as the Bank for the Government, providing transaction services, financial advice, and foreign exchanges. It allows New Zealand to trade with foreign countries, allowing for the easy transfer and conversion of money (Peare, 1999)(The Reserve Bank of New Zealand, 2002).

The Reserve Bank Act 1989 states that the primary function of the bank is to provide stable price levels. This is achieved by the Policy Targets Agreement, which sets out specific stable price goals. Once the setting of the policy is complete, it is required to be announced publicly, and any future changes must also be made public. The Reserve Bank’s Policy Target Agreement currently has four sections. The first says that so monetary policy can have the greatest positive impact on sustainable economic growth, development, and employment, stability in the level of prices must be maintained. The second requirement is to maintain inflation between 0-3%. The third states that when a one off event causes inflation to rise above 3%, efforts are made to ensure that it does not have a permanent effect that would maintain high inflation. The fourth requirement is that the Reserve Bank is to be accountable for any decisions it makes, and must give explanations for any decision made. It also states that the bank must avoid causing any instability by introduction of any monetary policy (The Reserve Bank of New Zealand, 2002).

As part of maintaining price stability, the Reserve Bank is required to set the official cash rate. By setting this rate, the bank has a strong influence over such things as the 90-day bank bill rates, home mortgages, and so on. This leads to the bank having an overall influence on the economic situation, and thus, the inflation rate for New Zealand, keeping people in jobs, and money in pockets (The Reserve Bank of New Zealand, 2002).

Bibliography:

References

Peare, P. (1999). An Introduction to the New Zealand Financial System. 4-44.

Spencer, G. (1990). Monetary Policy: The New Zealand Experience 1985 – 1990. Reserve Bank Bulletin 53.

Spencer, G., & Carey, D. (1988). Financial Policy Reform – The New Zealand Experience 1984 – 1987. Reserve Bank of New Zealand Discussion Paper G88/1.

The Reserve Bank of New Zealand (2002). Http://www.rbnz.govt.nz.

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