Parliament to ratify new RBNZ Funding Agreement

Finance Minister Michael Cullen today tabled in the House a notice of motion to ratify an amendment to the Funding Agreement between the Reserve Bank and the government.

The change, which was approved by the Cabinet last week at the Bank’s behest, is necessary to enable the Bank to pursue a more active role in foreign exchange markets and is supported by all parties in the House with the exception of National and Act.

Further elements of the package are: an increase of $1.9 billion to the Bank’s foreign currency reserves fund, taking the total to around $7 billion, for stabilising the foreign exchange market during periods of market dysfunction; approval of further reserves to trim the peaks and troughs of the exchange rate cycle; and an increase of $1 billion in the Bank’s equity to 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.

“They are strongly supported by the government as they are consistent with the changes we have introduced to monetary policy since taking office in 1999.

“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 Cabinet paper, relevant Treasury advice and supporting documentation from the Reserve Bank will be available today on the Treasury and Reserve Bank websites: http://www.treasury.govt.nz or http://www.rbnz.govt.nz

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