The Reserve Bank of New Zealand (RBNZ) is the central bank of New Zealand. It was founded in 1934 and is currently established under the Reserve Bank of New Zealand Act 2021. The Governor of the Reserve Bank, currently Adrian Orr, is responsible for New Zealand’s currency and operational monetary policy.
The Reserve Bank of New Zealand does not provide financial services to the public and does not offer deposit insurance, and its website directs people to other financial institutions.
History
The Reserve Bank of New Zealand was established on August 1, 1934 under the Reserve Bank of New Zealand Act 1933. The Reserve Bank first issued banknotes in 1934, see New Zealand pound.
The Reserve Bank of New Zealand Act 1989, which came into force in February 1990, introduced an inflation targeting regime for the bank. New Zealand was the first country in the world to test this regime, which was later adopted in other countries.
The main functions and responsibilities of the bank have changed several times throughout its history. In 2018, the Labour-led coalition government passed the Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018, which established the bank’s monetary policy committee and codified “maximum sustainable employment” as a monetary policy objective alongside price stability.
In 2021, the government passed the Reserve Bank of New Zealand Act 2021, which established a new statutory governing board appointed by the Governor General of New Zealand on the advice of the government and the Governor of the Reserve Bank. The RBNZ Act of 2021 also appointed the New Zealand Ministry of Finance as the bank’s external controller, required the bank to publish annual performance expectations and financial risk management reports, and created a new foreign reserve coordination structure.
In December 2023, the national-led coalition government passed the Reserve Bank of New Zealand (Economic Objectives) Amendment Act 2023, which removed maximum sustainable employment as the Bank’s objective and returned the Bank’s focus to managing price stability.
Monetary policy
The main function of the Reserve Bank, as defined in the Reserve Bank of New Zealand Act 2021, is to ensure “stability in the general level of prices” and “maximum sustainable employment.”
The Reserve Bank is responsible for the independent management of monetary policy to maintain price stability. The degree of price stability is determined by a target policy agreement with the Minister of Finance. Policy targets are public documents, so the government cannot secretly change the targets to get a short-term surge in economic growth.
The mechanism for this is the official cash rate, which affects short-term interest rates. The NBU will provide overnight cash to banks at 0.50% above the cash rate, under reliable protection without restrictions. In addition, the bank accepts deposits from financial institutions with interest, usually at the official cash rate.
Banks that offer loans at interest rates higher than the official cash rate will be undercut by banks that offer cheaper loans, and banks that lend below the official cash rate will receive less compared to other banks that can simply place their money with the Reserve Bank. with a higher rate of return. The Reserve Bank borrows and offers loans without limiting the amount to ensure that the interest rate in the market remains at the level of the official cash rate.
By controlling this, the Reserve Bank can then influence short-term demand in the New Zealand economy and use this to control prices.