In a keynote speech delivered at the UBS Australasia Conference in Sydney today, Karen Silk, general manager of economics, financial markets and banking, said our balance sheet was “a tool of politics, not profit”.
Read the speech
The speech focuses on how we can think of the central bank’s balance sheet as a tool for financial stability and outlines some of the recent steps we have taken to strengthen our balance sheet for this purpose, particularly with regard to foreign reserves.
Like most central banks, we hold foreign reserves on our balance sheet. This portfolio consists of foreign currency assets, such as foreign government bonds, which can be used to intervene in the foreign exchange market to support both financial stability and monetary policy objectives.
“This could include intervening in response to times of market disruption or when the exchange rate is extreme and unjustified relative to economic fundamentals,” she says. Dysfunction means that the market is not functioning normally and it is difficult to execute trades.
“As a small open economy, the foreign exchange market is very important to New Zealand,” says Karen Silk.
Working with the Treasury and the Secretary of the Treasury through the Foreign Reserves Coordination Framework, we have determined that higher levels of foreign reserves are appropriate.
“We’re building towards that now,” she says. This will take many years to ensure minimal market disruption.
“We now have a greater level of pre-deployed financial resources in the form of capital and compensation, allowing us to intervene in markets when necessary to support financial stability.”
Disclaimer
This speech is not a communication from the Monetary Policy Committee and does not provide any guidance on the future course of monetary policy. For the MPC’s latest views, see our recently published Monetary Policy Review.
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