Story: Reserve Bank

The Reserve Bank has a number of levers to pull to manipulate the New Zealand economy. It can pressure banks’ interest rates and intervene in the foreign exchange market to keep the economy healthy. Since 1989 the bank’s mandate has shifted from ensuring full employment to restraining inflation.

Full story by John Singleton
Main image: Reserve Bank chief currency manager Brian Lang with shredded surplus bank notes

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The Reserve Bank is an agency which stands between New Zealand’s banks and the government. It oversees the banking system, and can influence bank interest rates, the amount of money that people spend and inflation in the economy.

Before the bank was set up in 1934, banks each issued their own currency. After that the Reserve Bank issued New Zealand’s notes and coins. At first the Reserve Bank was two-thirds owned by the government and one-third by private shareholders.

1936 to 1984

In 1936 the government purchased the remaining shares of the Reserve Bank. All banks followed strict rules.

The government used the Reserve Bank’s power to try to maintain full employment. In the mid-1970s there were two oil crises and changes in the growth of the economy. In the early 1980s Prime Minister Robert Muldoon introduced a wage and price freeze to try to reduce inflation and refused Reserve Bank advice if he disagreed with it.

Independent bank

In 1984 a Labour government was elected. They floated the exchange rate and scrapped many banking rules. Inflation and interest rates rose, but so did the value of the New Zealand dollar, which brought inflation down.

The Reserve Bank Act 1989 gave the bank the task of keeping prices and the financial system stable. The governor of the bank and the minister of finance set targets for the economy, and the bank was free to implement policies it thought would meet the target. The bank had to keep the public informed about its decisions and the economy. Its main aim was to keep inflation low. From 1999 it used the official cash rate – the interest rate at which it lent money to banks – to achieve this.

Bank supervision

The Reserve Bank did not introduce a system to supervise banks until 1987. Between 1984 and 1987 some newly deregulated banks made foolish business decisions. In 1989–90 the Bank of New Zealand came close to collapse and the government had to rescue it.

In 1996 the Reserve Bank introduced bank supervision based on ‘disclosure and attestation’ – banks had to disclose key information to the public and bank directors had to attest to its accuracy.

In the early 2000s the New Zealand dollar began to rise and in 2004 the government authorised the Reserve Bank to intervene in the foreign exchange market to prevent sudden changes in value, but this did not often happen. In 2008 the bank was given the responsibility of looking after other finance companies.

During the world economic crisis in 2007–10, New Zealand fared better than some other economies.

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How to cite this page:

John Singleton. 'Reserve Bank', Te Ara - the Encyclopedia of New Zealand, updated 9-Nov-12
URL: http://www.TeAra.govt.nz/en/reserve-bank