Central Bank Emergency Support to Securities Markets

Central Bank Emergency Support to Securities Market

The Reserve Bank’s new approach to holding and managing its foreign reserves

The structure and management of the Reserve Bank’s balance sheet has changed significantly over the last five years. A big area of change has been in the way that foreign reserves are financed. The Reserve Bank no longer finances its foreign reserves on a fully currency-hedged basis, and now predominantly uses the long-term funds on its balance sheet that naturally arise from its core statutory functions to finance foreign reserves more cheaply and more flexibly than was possible in the past. These efficiency gains have been made possible by changing the way we manage our balance sheet from a model where the financial aspects of different business functions were managed separately to a new integrated asset and liability management model. These changes have been designed to improve the Reserve Bank’s ability to meet its policy functions in a more efficient and cost-effective manner. Our experience of the global financial crisis has shown the Reserve Bank’s new balance sheet structure to be effective and resilient at the time when its financial resources have been most in demand.

The behaviour of mortgage interest rates in New Zealand

A model of mortgage rate setting is presented and the behaviour of mortgage rates over the last year is discussed with reference to the predictions of the estimated model.

The currency denomination of New Zealand’s unhedged foreign reserves

In July 2007 the Reserve Bank added un-hedged foreign currency assets to its foreign reserves portfolio. This means that some of the Bank’s reserves are now funded directly in New Zealand dollar (NZD)-denominated borrowings as opposed to in foreign currency. When reserves are fully hedged, foreign currency assets are matched with foreign currency liabilities, leaving little net foreign exchange (FX) risk. When reserves are held on an unhedged basis, the level of FX risk is greater and the relative rate of return associated with alternative foreign reserve currencies are more variable. These different properties make the composition of the basket of foreign reserve currencies the Reserve Bank holds more important and requires the development of a strategic FX benchmark to guide the investment of the Bank’s unhedged reserves. This article describes the development and implementation of the Reserve Bank’s new strategic FX benchmark.

Developments in the Eurokiwi bond market

This article talks about the offshore market for borrowing and lending in New Zealand dollars (commonly referred to as the `Eurokiwi' market).

Capital structure choice and financial market liberalization: evidence from New Zealand

The extensive 1980's deregulation of New Zealand financial markets is exploited to provide a unique test of capital structure theory. Specifically, debt choices of New Zealand corporate firms during pre-reform (1982-1985) and post-reform (1986-1989) periods are analysed and compared. However, consistent with evidence from other countries, existing hypotheses are able to explain relatively little of the cross-sectional variation in either long- or short-term debt usage. More significantly, this lack of explanatory power is consistent across pre- and post-reform periods.

The Reserve Bank's new foreign exchange intervention policy

Last year the Reserve Bank concluded a review of its foreign exchange intervention policy. The review resulted in a recommendation to the Government that the Bank be given the capacity to broaden the objectives of foreign exchange intervention towards helping the Governor achieve monetary policy objectives as dictated by the Policy Targets Agreement (PTA). This article describes our new intervention role and the implications for the management of the Bank's foreign reserves.