The Reserve Bank of New Zealand, also referred to as the RBNZ, is one of the leading apex banks in the world. It is the central bank of New Zealand, and it was created by the New Zealand government with the purpose of maintaining the stability of the country’s financial system.
What Are the Origins of the RBNZ?
After the passing of the Reserve Bank Act of 1933, the central bank of New Zealand was established in 1934. Interestingly, the RBNZ has been fully owned by the New Zealand government since 1936 although it is not recognised as a department of the government. The RBNZ is constituted under the Reserve Bank of New Zealand Act 1989 and the Governor of the bank is in charge of the country’s currency and operating monetary policies, with the bank employees working under the framework of a managerial hierarchy.
The Act of Parliament enacted on the bank in 1989 gave it statutory independence. This means that the Reserve Bank of New Zealand is accountable to the Parliament, yet it does deliver an annual dividend to the government. The bank, which is headed by Adrian Orr, as of July 2020, has the sole right to issue New Zealand legal tender notes and coins. The RBNZ controls the issuing of currency to private banks, while it also replaces the used and damaged currencies in circulation.
The Reserve Bank of New Zealand operates centrally from Wellington, which is the capital of the country. The central bank is led by seven people who form the senior leadership team. The Governor of the RBNZ is supported by six other deputy governors who are tasked with handling the various aspects of the bank’s affairs.
Functions and Roles of the RBNZ
The Reserve Bank of New Zealand comprises of several departments and carries out a variety of major functions. The functions of the bank include:
- Responsible for issuing the country’s currency, which is the New Zealand dollar (NZD), also known as the Kiwi dollar or the Kiwi. The NZD is one of the most highly traded currencies in the world. The RBNZ is responsible for meeting the currency needs of the public.
- The RBNZ designs the monetary policy framework in the country aimed at maintaining price stability. The RBNZ reviews the monetary policy eight times a year, i.e. approximately every six weeks.
- Develop financial and regulatory policies of the country.
- Provides an Annual Report, an annual accountability document, to the Minister of Finance. The report has to be submitted by no later than three months after the end of the financial year.
- Provides a Statement of Intent (SOI) to the Minister of Finance before the start of each fiscal year. This document outlines the way the RBNZ intends to operationally carry out its duties over the following three years.
- Responsible for regulating private and public banks, insurers and non-bank deposit takers such as credit unions.
RBNZ Regular and Alternative Monetary Policy Tools
The Reserve Bank of New Zealand deploys both regular and alternative monetary policy tools to help drive the economy forward. Some of the monetary policy mechanisms used by the RBNZ include:
Monetary Policy Statement
The Monetary Policy Statement, released quarterly, outlines how the central bank intends to achieve its inflation targets, how it wants to formulate and implement monetary changes during the next five years, and how the policies have been implemented since the last statement release.
RBNZ Rate Statement
The rate statement is the primary tool used by the central bank to communicate with investors regarding their monetary policy. The RBNZ rate decision contains the details of their interest rate decisions as well as the economic factors which impacted the decision.
Forward guidance in the monetary policy of the RBNZ refers to information provided by the central bank about future policy settings. The purpose of the forward guidance is to attempt to influence the financial decisions of investors, businesses and households. This is done by providing guidance on the expected path of interest rates.
OCR (Official Cash Rate)
The Official Cash Rate (OCR) is the interest rate which is set by the RBNZ. The purpose is to meet the dual mandate specified in the Remit to the Monetary Policy Committee. The OCR influences the price of borrowing money in New Zealand. As such, it provides the RBNZ with the ability to influence inflation and the level of economic activity.
Interest Rate Swaps
The RBNZ enters interest rate swaps as a way to reinforce forward guidance and reduce market interest rates. Interest rate swaps and bank bills make up the benchmark commercial bank liability yield curve.
RBNZ in Fundamental Analysis
Major announcements from the RBNZ usually affect the value of the country’s currency, the New Zealand dollar (NZD). For instance, interest rates targeting government bonds usually improve the transparency of the bank and positively affects the performance of the Kiwi on the international stage. However, downbeat forward guidance and the mention of negative rates by the RBNZ are enough to drag the NZD trading pairs down.
In addition, due to New Zealand’s strong economic ties with China, the Kiwi is affected by certain financial policies. Any mention of trade terms with China or other trade partners is usually closely observed by investors, which then leads to an immediate reaction in the price of the NZD.
Reserve Bank of New Zealand main FAQs
Who owns the Reserve Bank of New Zealand?
Unlike many other central banks that have no ownership, the Reserve Bank of New Zealand is wholly owned by the New Zealand government. This means that the RBNZ actually pays a dividend to the New Zealand government each year from its profits. The RBNZ has been owned by the New Zealand government since 1936 and is accountable to Parliament. Like other global central banks, the RBNZ primarily exists to foster price stability and economic growth. The RBNZ also has the sole right to issue currency in New Zealand.
How much impact does the Reserve Bank of New Zealand have on global forex markets?
As one of the top eight largest economies in the world the Reserve Bank of New Zealand’s monetary policies can have an impact on global forex markets, although typically rate changes primarily impact the Asian currencies. There is some impact to the US dollar, but only in direct connection with the New Zealand dollar. The New Zealand dollar was once quite popular among forex traders as the interest-bearing portion of the carry trade, but more recently interest rate cuts have taken this currency out of consideration as part of a carry trade.
What determines the exchange rate for the New Zealand dollar?
As is true for any free market the value of the New Zealand dollar versus competing currencies is determined by supply and demand for each currency. Increase in demand for a currency is the result of an increase in the value of the country’s exports, an increase in the country’s economy, or an increase in foreign investment in the country. Conversely supply for a currency increases when the value of a country’s imports rises, when the amount of overseas investment increases, and when residents choose to vacation overseas rather than domestically
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** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.