The Reserve Bank of New Zealandis that country’s central bank. It works to uphold a vibrant and sound financial and monetary system by conducting monetary policy to attain and sustain price stability (its primary function), supporting the working of a well-organized financial system, fulfilling the general public’s currency requirements and managing and operating competent payment systems.
The bank was founded in 1934 and constituted under the Reserve Bank of New Zealand Act 1989. It does not have elements of private ownership, unlike the US Federal Reserve System. The Government of New Zealand fully owns it, and any extra revenue it makes goes to government accounts. By virtue of the Reserve Bank Act, it has the sole right to control, design, print and issueNew Zealandlegal tender notes and coins and remove and destroy damaged and unusable currency.
At present the bank’s Policy Targets Agreement calls for it to keep inflation between one and three percent on average over the medium term. InNew Zealandprice stability must be delineated in a detailed public contract, settled between the Minister of Finance and the Reserve Bank. The bank prints its Monetary Policy Statement quarterly, describing how the bank intends to realise its targets, how it plans to create and apply monetary policy during the next five years and how policies have been implemented since the last statement.
The bank functions as a banker to other banks, supplying inter-bank settlement facilities and related payment services. It controls foreign exchange reserves and advises the government on the operation of the financial system. It also offers clearing and settlement services to the government and financial institutions. The bank keeps close watch on the financial system, manages the banking system’s liquidity and provides overseas representation and liaison services.
The Reserve Bank Act also directs the organisation to avoid the major damage that a failing registered bank could cause the financial system. To fulfil this condition, the Reserve Bank registers commercial banks and uses a prudential surveillance system to push banks and other financial institutions to carefully manage their risks. New Zealand’s government decided to expand the role of the Reserve Bank in 2007 to include not only banks but also credit unions, building societies, insurance and finance companies.
Like most central banks, the Reserve Bank intervenes in the market periodically.New Zealand’s Head of State, the Governor-General, may also, on the advice of the Minister of Finance, direct the bank to create and execute monetary policy for any economic purpose for a period of 12 months or less. The 12-month period can be extended on successive occasions at the discretion of the Governor General.
While the Reserve Bank does not guarantee that an individual bank will not fail or face problems, its central role is to ensure that the New Zealand banking system remains healthy. It lends and borrows without placing a limit on volumes so that interest rates remain at the level mandated by the Official Cash Rate. Through this system, the bank can manipulate demand in the short term and thus control prices.
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