Bollard resets strategic priorities

Allan Bollard. Photo / Mark Mitchell

The Reserve Bank has reset some "strategic priorities" to ensure the economy and banking sector continue to cope with the financial crisis and potential aftershocks.

New Zealand had, so far, got off "remarkably lightly" from the series of global financial shocks compared with the larger Northern Hemisphere economies, Governor Allan Bollard said in the Reserve Bank's Statement of Intent yesterday.

"Nevertheless, financial aftershocks still rock our markets, with New Zealand dollar investments swinging in and out of favour by the day as market appetite for risk fluctuates," Bollard said in the document which outlines the RBNZ's approach over the next three years.

It was likely to be "some significant time" before economic activity returned to robust and healthy levels, even longer if the incidence of swine flu was severe.

"The bank is ensuring that it can maintain its operations if the virus escalates. In these volatile and uncertain circumstances, we have reset some of our strategic priorities to ensure outcomes that we would take for granted in normal times: that our markets can still deliver sufficient funding to the economy, that our banks have adequate capital," he said.

Bollard pointed out several measures the bank had already taken to ensure adequate liquidity in the banking sector "and is assessing options should the need for further measures arise".

The RBNZ would also further increase its monitoring of banks' prudential status "with a particular focus on early identification of any deterioration in asset quality and of any impact this may have on capital adequacy".

The financial crisis had complicated the influence of monetary policy on financial conditions and the RBNZ would develop "analytical tools and research knowledge in response".

"To casual observers, our primary objective of maintaining price stability may seem the least of our concerns in the current climate," said Bollard,

"But an enormous challenge looms in the inflationary risks once confidence returns to normal in global markets when there is so much liquidity around. We will be focused on these risks as we consider the likely nature of a recovery."

With an eye on aftershocks of a different kind, the RBNZ will establish an Auckland office to "provide backup for essential payments and financial markets operations in the event of a physical disaster in Wellington".

Other ongoing initiatives include implementation of the RBNZ's Financial Sector Information System, under which existing surveys and data sets will be combined with new ones, including information gathered from non-bank deposit takers and the insurance sector.