Reserve Bank to get $1.9b in extra reserves

2.30pm

Finance Minister Michael Cullen said today the Reserve Bank would boost its foreign exchange reserves by $1.9 billion and get $1 billion in extra equity under new arrangements to allow the bank to intervene in the forex market.

Dr Cullen tabled in the House today a notice of motion to ratify an amendment to the Funding Agreement between the Reserve Bank and the Government.

The bank's equity at June 30, 2003 was $416 million. The capital injection would be provided from the Crown to the bank. The bank would then invest it in government bonds until such time as it might use it to intervene, a spokeswoman for Dr Cullen said.

The change to the Funding Agreement, which was approved by Cabinet last week at the bank's behest, was necessary to let the bank pursue a more active role in foreign exchange markets and was supported by all parties except National and Act, Dr Cullen said.

The increase in reserves would give it around $7 billion, "for stabilising the foreign exchange market during periods of market dysfunction".

The amendment would also approve further reserves "to trim the peaks and troughs of the exchange rate cycle".

The increase in the bank's equity would "assist it to cope with the risks associated with intervention".

"These measures should assist the economy by tempering exchange rate volatility and will move New Zealand monetary management closer toward Australian practice," Dr Cullen said.

The bank said it would only intervene at the extremes of the cycle and critics say that would be different from the Reserve Bank of Australia, which regularly intervenes in the market.

Dr Cullen said he strongly supported the bank's request to have the power to intervene and the change was consistent with those introduced to monetary policy since 1999 when Labour came to power.

"The first Policy Targets Agreement I agreed to as minister incorporated a requirement that the bank, in pursuit of its inflation target, should seek to avoid unnecessary instability in output, interest rates and the exchange rate.

"The second PTA, negotiated when Dr Alan Bollard took over as governor, raised the bottom of the target band from 0 per cent to 1 per cent and required the bank to take a forward-looking, medium-term approach to achieving price stability.

"All these moves had a common objective: to provide as steady and as stable an economic environment as possible. I welcome this as another step in that direction," Dr Cullen said.

The New Zealand dollar fell to US65.00c from US65.15c shortly before the announcement.

- NZPA