The Reserve Bank of New Zealand (RBNZ)

The financial entity that is responsible for the monetary policy of New Zealand is the Reserve Bank of New Zealand (RBNZ). The weekly revision of the monetary policy of the country is done by the Monetary Policy Committee. Eight times every year or approximately every six weeks, meetings are held on which decisions regarding changes in the monetary policy are taken. The Governor of the central bank is solely responsible for the rate changes that should be made.

Policy stability and the avoidance of needless output, interest rate and exchange rate instability are included in the Policy Target Agreements. The latter is established by the Governor of the central bank of New Zealand and its Minister. The maintaining of a 1.5% annual CPI inflation rate is regarded as price stability. Governor of the RBNZ can be removed from his/her position if s/he fails to meet this target rate. As a result, the central bank is motivated to do its best in meeting the pre-determined target rate.

In order to implement the monetary policy, the RBNZ applies the following tools:

1. Official Cash Rate (also known as OCR)

   The implementation of the monetary policy is done through this rate. The interest rates that individuals and corporations receive are controlled by the RBNZ through the monitoring and management of the cost of liquidity the commercial banks incur. Since funds are lent at lower rates by the RBNZ, takers are discouraged from using the services of other banks, which tend to offer funds at levels above the upper bound. Additionally, RBNZ will offer higher yields than other banks when the latter offers funds at a rate that is less than the lower bound. This will lead to attracting takers to the RBNZ. In order to maintain economic stability, the central bank may embark on manipulating and reviewing the official cash rate.

2. Open Market Operations

   New Zealand's central bank tends to apply open market operations so that it can successfully meet the pre-determined cash target. The latter represents the targeted amount of reserves that registered banks keep. In order to determine what amount of funds should be injected or withdrawn from the economy, the central bank makes forecasts of the fluctuations that occur on daily basis. This is done so that the cash target is reached.

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