This is the Reserve Bank
Introduction
The Reserve Bank of New Zealand is New Zealand’s central bank. It was established in 1934 and has been wholly owned by the government of New Zealand since 1936.
This is The Reserve Bank
The Reserve Bank is a ‘full-service’ central bank, meaning that its functions and activities cover the complete range of normal central banking roles. These include implementing monetary policy, financial system oversight, financial markets activities, clearing and settlement services, banking system liquidity management and oversight, and providing currency to the public. Not many central banks around the world offer services in all these areas. One outcome is that the Reserve Bank is able to deploy a full kit of economic and financial tools, giving it a wide and integrated capacity to meet a significant range of economic and financial system issues, in good times and in bad.
The main functions of The Reserve Bank
The full-service facilities of the Reserve Bank reflect its three main functions:
• operating monetary policy to maintain price stability;
• promoting the maintenance of a sound and efficient financial system; and
• meeting the currency needs of the public.
These functions are specified in the Reserve Bank Act 1989, which also gives the Reserve Bank statutory independence to carry them out. Aspects have since been refined by a variety of amendment acts, and have included an expansion of the financial supervision role, which is a significant mechanism for maintaining a sound and efficient financial system.
Tasks carried out by the Reserve Bank to fulfill its main functions include:
- formulating and implementing monetary policy;
- registering and monitoring banks, and requiring banks to meet certain criteria;
- regulating non-bank deposit takers;
- monitoring the financial system for stability;
- providing banking services to the banks, which make payments to each other through ‘settlement accounts’ at the Reserve Bank. Some banking services are also provided to government;
- holding and managing New Zealand’s foreign exchange reserves; and
- issuing New Zealand banknotes and coins.
Monetary Policy
New Zealand’s monetary policy framework is conventional by current international standards. It is designed around an overall goal of price stability, laid out in the Reserve Bank Act 1989 and defined and specified by a Policy Targets Agreement. At the time of writing, this requires the Bank to keep CPI inflation between 1–3 percent, on average, over the medium term. Inflation is rising prices, meaning money is losing its value. The target range, on average, of 1–3 percent is broadly regarded as ‘price stablility’, in part because the CPI measurement reflects an average ‘basket’ of goods and services purchased by a particular income group, and does not include some high-priced luxury items which, typically, fall in value as they become common.
The policy target also has a floor to it, meaning that the bank must be mindful of the flip-side of inflation – deflation.
This is when prices fall and money gains value. Both inflation and deflation have different effects on an economy and both, if sustained or if running at high levels, can be damaging. Deflation can be particularly so, because money gains value merely by being kept; there is no incentive to invest. For this reason, the goal of monetary policy is price stability – the target agreement has a floor as well as a ceiling.
However, in New Zealand – as in much of the western world – inflation has been historically more common. At times, and particularly between the late 1960s and late 1980s, New Zealand’s inflation has been quite high. On average, purchasing power fell by more than 90 percent from the late 1960s to the early 1990s, when the first statutory price-stability target was achieved. The Reserve Bank publishes a Monetary Policy Statement, which outlines recent economic events and how the Bank has responded to them. The Reserve Bank is legally required to publish this document twice a year as part of its accountability to the government. However, the Reserve Bank actually publishes it four times a year because it is useful to communicate to financial markets and the public its view about the economy and so manage expectations about future inflation.
For further information, refer to the latest Monetary Policy Statement http://www.rbnz.govt.nz/monpol/statements/ and to the brochure Explaining Monetary Policy http://www.rbnz.govt.nz/publications/3064172.pdf (PDF 415KB) .
Foreign exchange
intervention
The Reserve Bank holds and manages New Zealand’s foreign exchange reserves. New Zealand has had a floating exchange rate since 1985, meaning that the value of the New Zealand dollar against other currencies is set by the market. However, the New Zealand government retains a capacity, via the Reserve Bank, to trade in the foreign exchange market. This is retained for two reasons; firstly, to potentially reduce the peaks and troughs of the exchange rate cycle – which is integral to monetary policy – and secondly, to provide liquidity in a crisis. Intervention would involve buying or selling New Zealand dollars in exchange for other currencies, with the aim of restoring a smoothly functioning private market.
Financial system supervision
Registered banks must meet certain criteria, including with regard to their financial position, and only organisations formally registered with the Reserve Bank are entitled to use the word ‘bank’ in their names. In late 2007 the decision was taken by the government to extend the Bank’s regulatory oversight to non-bank deposit takers such as finance companies, building societies and credit unions.
The Reserve Bank’s role in the New Zealand financial system has developed over the years, and includes a requirement that banks must be registered with the Reserve Bank.
Under current regulations, registered banks must issue public disclosure statements four times a year. These must lay out in detail the state of each registered bank’s finances, and considerably more information must be revealed than in the annual report of an ordinary listed company. Public disclosure statements are intended to warn depositors if a bank is at risk and, equally importantly, to encourage bank managers and their directors to behave prudently in the first place.
Banks also have to meet certain minimum standards, set out in detailed regulations. These include minimum capital ratios to provide reassurance that banks have the resources available to meet their obligations and to provide a cushion against unexpected losses; for example, through losses on their loans. Similar regulations are being progressively introduced for non-bank deposit takers.
The Reserve Bank publishes a six-monthly transparency document and round-up of recent events, the Financial Stability Report.
For further information, refer to the latest Financial Stability Report http://www.rbnz.govt.nz/finstab/fsreport/.
Payment and settlement systems
The Reserve Bank also operates New Zealand’s wholesale payment and settlement systems – the Exchange Settlement Account System (ESAS) and the Austraclear New Zealand system, which the registered banks use to complete their transactions with each other. These handle approximately $40 billion in transactions per day.
The Austraclear New Zealand system provides real-time delivery and payment services for debt and equity securities. Members can also use this system to make large-value electronic payments. All securities in the Austraclear system are held on behalf of members by New Zealand Central Securities Depository Limited, which is a custodian trustee wholly owned by the Reserve Bank.
Banking guarantees
The Reserve Bank itself does not guarantee or underwrite any individual bank or other financial provider; its function refers to the stability of the system, not any single institution. However, an opt-in government deposit guarantee scheme, available to all eligible deposit takers, was introduced in October 2008 for a period of two years, followed by a wholesale funding guarantee scheme; both are administered by the Treasury.
Currency functions of the Reserve Bank
The Reserve Bank of New Zealand Act 1989 gives the Reserve Bank the sole right to issue New Zealand’s bank notes and coins. The Reserve Bank controls the design and printing of New Zealand’s currency, and issues money to registered banks. The Reserve Bank also withdraws damaged or unusable currency from circulation.
Banks buy currency in wholesale amounts from the Reserve Bank at face value and return damaged or soiled bank notes to the Reserve Bank for replacement. These are inspected by the Reserve Bank for quality and also to detect any forgeries. The introduction of polymer bank notes in 1999 has made New Zealand’s bank notes much harder to forge. In 2006, new and smaller plated steel coins were introduced to replace the older cupronickel 50, 20 and 10 cent pieces.
For further information on New Zealand’s currency, refer to the Reserve Bank website, and the brochure Explaining Currency: New Zealand’s bank notes and coins(PDF 398KB) http://www.rbnz.govt.nz/currency/money/explaining_currency.pdf
New Zealand’s circulating currency
New Zealand’s current notes and coins have all been introduced since the early 1990s. The notes feature Sir Edmund Hillary ($5); Kate Sheppard ($10); H.M. Queen Elizabeth II ($20); Sir Apirana Ngata ($50); and Ernest, Lord Rutherford of Nelson ($100). The 10 and 50 cent pieces preserve the original 1967 decimal designs by James Berry.
Governance of The Reserve Bank
Under the Reserve Bank Act 1989, the Governor of the Reserve Bank is accountable to the government for the Bank’s performance, but in most areas the Governor has statutory independence as to how outcomes are achieved. There is no day-to-day ministerial involvement in, or responsibility for, most of the operations of the Reserve Bank.
The Reserve Bank Board of Directors is appointed by the government, but it is not a decision-making body. The Board’s function is to regularly review the Governor’s and the Reserve Bank’s performance, and to provide feedback to the Minister of Finance. The Board makes recommendations to the Minister of Finance on the appointment or reappointment of the Governor, and, in extreme circumstances, can advise that the Governor should be dismissed for inadequate performance, especially in terms of the Reserve Bank delivering price stability.
The Governor is assisted by a committee system within the Reserve Bank. The minutes of those committees are not published because, although the Governor receives extensive advice, the final decisions are his alone. The Governor is then held accountable by the Board and the Minister of Finance. The Governor regularly appears before the Finance and Expenditure Select Committee of Parliament. He has an active public speaking programme and faces constant media scrutiny.
The Minister of Finance appoints the Governor on the recommendation of the Board for a five-year term. Dr Alan Bollard became Governor of the Reserve Bank in September 2002, and his term was renewed for a further five years in September 2007.
Past Governors of The Reserve Bank
To date the Reserve Bank has had ten Governors. Following British practice, Governors are traditionally commemorated with a formal painting.
Artists such as Sir William Dargie and Archibald Nicoll have contributed to what has become a significant collection of portrait artwork.
Visit Governors of the Reserve Bank - past and present http://www.rbnz.govt.nz/about/Whoweare/0092786.html to see portraits of the governors, and for more information.
The Reserve Bank Museum
The Reserve Bank operates a small museum that celebrates New Zealand’s economic and banking heritage. It is designed as a public education resource and includes a significant range of exhibits, including the only operating example in the Southern Hemisphere of a water-based MONIAC economic computer.
For further information on the Reserve Bank museum, refer to the range of pamphlets, fact sheets and brochures issued by the museum and available on the Reserve Bank website, http://www.rbnz.govt.nz/about/museum/2766074.html.
Reserve Bank Organisation and Building
To meet its varied tasks, the Reserve Bank comprises an economics department, which conducts research into the economy and provides advice on monetary policy; two departments associated with financial stability, oversight and financial markets operations; and a currency department responsible for the design and wholesale issue of notes and coins.
Support departments include a Financial Services Group, Knowledge Services Group, Communications department, an internal audit unit, and a Human Resources department. The Reserve Bank also operates a small public museum.
The Reserve Bank employs approximately 230 staff and operates from a purpose-built office building on The Terrace in Wellington.
The Reserve Bank Building
The Reserve Bank initially operated from premises on Featherston Street. These were always meant to be temporary, but plans during the 1940s and 1950s to construct purpose-built offices stalled. It was not until the mid-1960s that work began on the Reserve Bank building on The Terrace. This was completed in 1972 and has housed the Reserve Bank since.
For Further Information
The Reserve Bank publishes a wide range of documents and other information in print and other media. These are publicly available free of charge either via the Reserve Bank Knowledge Centre, email rbnz-info@rbnz.govt.nz or by download from our website, www.rbnz.govt.nz
