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Central Banking and Monetary Policy in New Zealand

Paper Type: Free Essay Subject: Finance
Wordcount: 1873 words Published: 8th Feb 2020

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Central banks assume an essential job in guaranteeing monetary and money related dependability.  They direct financial arrangement to accomplish low and stable expansion. In the wake of the worldwide monetary emergency, central banks have expanded their toolkits to manage dangers to money related security and to oversee unstable trade rates (IMF, 2018).  A key job of national banks is to lead financial arrangement to accomplish price stabilization (low and stable inflation) and to help oversee monetary variances.  By and large, nations around the world attempt to advance maximum employment and stable prices. 

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New Zealand’s current inflation rate is 1.9% and unemployment rate sits at 3.9% (Trading Economics, 2018).  The country’s economy has experienced a strong growth since 2011.  In comparison the United States is experiencing 3.7% unemployment (BLS, 2018) with inflation residing at 2.5% for the 12 months ended October 2018 (Coin News, 2018).  The Federal Reserve press release published on November 8, 2018 stated job gains have been solid, by and large, and the joblessness rate has declined. Family spending has kept on developing firmly while growth of business fixed investment has moderated from its quick pace earlier in the year.  On a year premise, both overall inflation and inflation for items other than food and energy stay close to 2 percent.  Signs of longer-term inflation expectations are minimal (FOMC, 2018). 

National banks utilize the financial strategies of monetary policy to control the cash supply in their nations.  To achieve monetary policy objectives central banks utilize a variety of financial tools.  The essential devices utilized are the discount rate, reserve requirement, open market tasks, and interest on reserves. Each of the four influences the measure of funds in the banking framework.

The Reserve Bank of New Zealand implements the principle instrument of monetary policy by setting the Official Cash Rate (OCR), which is reviewed eight times a year.  By setting the OCR, the Reserve Bank can impact loan costs and trade rates, which thus influence the dimension of monetary movement and expansion.  New Zealanders experience OCR when they borrow money at retail interest rates through mortgages, credit cards or personal loans, or when they save money in bank accounts that earn interest. Retail rates of interest are directly related to the OCR set by the Reserve Bank RBNZ, 2009).   

In addition to the OCR’s influence on New Zealand’s market interest rates, it is not the only factor.  Financial organizations are borrowers in financial markets abroad, so market interest rates, particularly for longer terms, are also affected by the interest rates prevailing offshore.  The value of the New Zealand dollar relative to other currencies tends to increase when the Reserve Bank increases the OCR,  and vice versa.  If speculators purchase New Zealand dollars, this will push up the cost of the New Zealand dollar.  The effect on financial activity interest rates and the conversion scale impact demand. 

For instance, if financing costs are expanded, this urges customers and firms to borrow less, on the grounds that they will have to pay more interest on their loan, and save more, in light of the fact that their reserve funds get a higher rate of interest.  This reduces activity in the economy.  Contra wise, a fall in financing costs demand for consumption and investment goods.

In the interim, the exchange rate influences the foreign currency prices of exports.  On the off chance the exchange rate is high, foreign currency prices of exports will also be high, reducing demand for exports.  Additionally, a high exchange rate reduces the price of imports, increasing demand for imports and dropping demand for domestically produced goods.  Thusly, a higher conversion rate will likewise diminish economic action (RBNZ, 2009).

The United States Federal Reserve has the responsibility by law to cultivate maximum employment and price stability.  To accomplish their mission the Fed has four tools at its disposal to influence the money supply.  Open market operations, interest on reserves, reserve requirements and the discount rate are utilized to modify the banking systems’ liquidity and affecting the measure of assets of these institutions (St. Louis Fed, 2018). 

 Open Market Operations has been a reliable tool and is the procedure of purchasing and selling U.S. government securities. This activity is directed by the FOMC and carried out by the Federal Reserve Bank of New York.  At the point when the Fed needs to grow the money supply, it will buy the government securities through an open market buy, subsequently expanding bank deposits (Federal Reserve, 2018).

 The policy of paying interest on reserves allows the Fed to use interest as a monetary instrument to influence bank lending.  Interest is paid on excess reserves held at Reserve Banks.  For instance, if the FOMC wanted to create a greater incentive for banks to lend their excess reserves, it can reduce the interest rate it pays on excess reserves. Banks would then be more likely to lend money rather than hold it in reserve and they can make more money.  In turn, if the FOMC needed to make a motivating force for banks to hold more excess reserves and decrease lending, the FOMC could increase the interest rate paid on reserves, which is contractionary policy.

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 The reserve ratio requirement is the portion of deposits banks must hold in cash, either in their vaults or on deposit at a Reserve Bank.  A decrease in reserve requirements is expansionary in light of the fact that it builds the assets accessible to consumers and businesses.  An increase in the required reserve is contractionary because it decreases the funds accessible by the banking system to lend to consumers and businesses. 

The discount rate is the interest rate charged to commercial banks for short-term loans.  Federal Reserve lending at the discount rate supplements complements open market activities in accomplishing the target federal funds rate and fills in as a reinforcement source of liquidity for commercial banks.  Reducing the discount rate is intended to encourage banks to borrow and make it easy for the banks to expand reserves. Increases in the discount rate are designed to discourage borrowing from the Fed thereby shrinking the commercial banks’ reserves (Federal Reserve, 2018).

The Reserve Bank of New Zealand’s purposes are specified in the Reserve Bank of New Zealand Act of 1989.  The Act provides the Bank with the functions and powers it needs to achieve its purposes.  Reserve Bank of New Zealand is responsible for maintaining the stability and order of the financial framework brought towards specific standards and laws as being the lender of last resort or preparing prudential strategy activities.  The reserve Bank supervises the allocation of surplus, screens the improvement of financial institutions with respect to their related settlement risks and their liquidity management, direct the buying and selling of foreign exchange, evaluate the state of business operations, capital adequacy, risk management, and financial foundations profitability of current account holders (RBNZ, 2018).

In the United States the law sets out the purposes, structure, and functions of the U.S. Federal Reserve System as well as outlines aspects of its operations and accountability. Congress assigned the Board of Governors with the responsibility of implementing the Federal Reserve Act and other laws pertaining the banking and financial activities.

The Federal Reserve directs the expansions of credit, measurement of equal credit opportunity, reserve requirements of depository institutions, electronic fund exchanges rules, restrictions on interbank liabilities, oversees international banking account activities in the United States, and consumer leasing (Federal Reserve, 2018).


  • Brandl, Michael. (2017). Money, Banking, Financial Markets and Institutions. Cengage Learning. Boston.
  • BLS. (2018). Unemployment Rate. Bureau of Labor Statistics. Retrieved from https://data.bls.gov/timeseries/LNS14000000

         Coin News. (2018). Current US Inflation Rates: 2008-2018. Coin News Media Group. Retrieved from https://www.usinflationcalculator.com/inflation/current-inflation-rates/


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