The Reserve Bank of New Zealand will spend the next year working on how to introduce new macro-prudential tools to accompany monetary policy, the central bank says in it latest statement of intent (SOI).
The Reserve Bank said in its Statement of Intent (SOI) for 2011-2014 it was focused on maintaining stability despite shocks from devastating earthquakes and continuing world financial and economic uncertainties.
“The effects of the Canterbury earthquakes are complex and significant,” Reserve Bank Governor Alan Bollard said.
"Understanding the inflation implications and designing monetary policy appropriate for the scale of rebuilding required in Christchurch will be especially challenging," Bollard said.
“At the same time, internationally, much of the world is still in recovery from the Global Financial Crisis, with continued uncertainty in some financial markets. On the economic front, rising commodity prices are improving export incomes, but putting pressure on the exchange rate,” he said.
The bank would asssess the impact of the Canterbury earthquakes and their implications for monetary policy.
“We will also be developing an implementation framework for macro-prudential policy tools in New Zealand which takes into account the inter-relationships with monetary policy," Bollard said.
The bank would also develop a plan for implementing the Basel III prudential requirements for banks, suitably adapted for New Zealand conditions. The bank also sought to put insurers on a path to obtaining full licences by September 2013, with provisional licensing requirements in place by March 2012.
The bank also planned for a new issue of bank notes.
Bollard said the earthquake did not appear to have impacted bank balance sheets much, but it had stressed AMI to the point where it needed government backing.
Global Financial Crisis
"Internationally, much of the world is still in recovery from the Global Financial Crisis. That is posing problems for some heavily indebted countries and sovereign debt markets. The ability of major economies – the US, the UK and Japan particularly – to recover domestically and address their own debt issues will be crucial for us," Bollard said in the foreword of the statement of intent.
"At the same time, we expect the New Zealand economy to be driven by continued growth in our East Asia and Australian trading partners. Related to this, high commodity prices have become an important engine of growth, but we expect price volatility will pose challenges for monetary policy," he said.
"Oil and food price rises fuelled by international political instability, along with global demand growth and supply disruptions, are starting to cause significant international inflation concerns."
Bollard said New Zealand households and businesses were behaving much more cautiously than before the Global Financial Crisis.
"This is slowing recovery, but is laying the groundwork for a more resilient economy for the future," he said.
Fiscal policy implications for monetary policy?
"With the earthquake and fragile international sovereign debt markets, the government’s fiscal burden is significantly tougher and that may have implications for monetary policy," he said.
"On a broader canvas, again coloured by experiences of the Global Financial Crisis, we will be considering the inter-relationship between monetary policy and potential macro-prudential policy tools to promote greater financial and macro stability. In particular, we need to understand the impact of such policies in mitigating credit booms and increasing the resilience of the financial system."
"Our experiences during the crisis, and changes to the financial market environment since, have also led us to review how we might improve the management of our foreign reserves, including introducing new improved benchmarks for our reserves portfolios," Bollard said.
"The slower domestic recovery is assisting financial stability, by gradually improving New Zealand’s significant external and financial imbalances. Banks’ balance sheets have recovered, although funding conditions are still challenging. "
Bollard said the bank's prudential supervisory teams were calibrating and fine-tuning regulatory requirements from Basel III. They were also working on open bank resolution, capital levels for agricultural lending, and liquidity requirements, which would include trans-Tasman stress tests.
"We are also looking into bank efficiency in New Zealand and comparisons with overseas."
(Updated with more detail, fresh link to Statement of Intent, comments from Bollard)