The New Zealand government added half a billion dollars to the Reserve Bank’s balance sheet last month and gave it an indemnity to provide fire-power to intervene in currency markets.
A Treasury document from May shows the agency recommended these measures to cover financial risks from holding and managing reserves, as well as “potential costs in the event of an intervention using hedged foreign reserves”.
The Reserve Bank website said since the NZ dollar has a floating exchange rate it can be mostly left alone, but there are situations in which intervention might be required.
For example, it could need to restore order in the currency market after a big earthquake, or a global financial shock.
“In these situations, liquidity in the NZD exchange rate may be heavily reduced or even disappear completely. We would be prepared to support liquidity until normal conditions returned,” it said.
Holding foreign reserves acts as a type of insurance against a major threat to financial stability which might occur during a crisis situation.
The other reason the Reserve Bank might intervene in the currency market was if the exchange rate was exceptionally high or low and causing problems in the NZ economy.
According to Reserve Bank data, it had currency intervention capacity of $12.9 billion as of June.
Treasury said the central bank’s current level of foreign reserves had not been updated to reflect growth in the economy and global financial markets and may not be sufficient for some scenarios.
The $500 million in fresh capital had been decided by modelling “severe but plausible scenarios” and would be sufficient alongside an indemnity.
The Reserve Bank would use the money to build up its foreign reserves and be ready to intervene at short notice.
Treasury said having the financial backing pre-positioned also provided the market with confidence and helped to mitigate possible crises.
Moving money from the Crown balance sheet to the Reserve Bank’s balance sheet doesn’t have any effect on net debt and can be done outside of the Budget process.
The indemnity would cover situations where the Bank intervenes in the foreign exchange market beyond its positive net foreign asset position and is effectively ‘short’ foreign currencies.
It is essentially a promise to cover the cost of any financial losses that occurred defending the currency.
Treasury said it expected this situation would be rare, and that an indemnity was preferable to a capital contribution
38 Comments
Can someone please explain why a short term inflation of goods and services(due to a short term shock to supply chains) could be worse for the average household bank balance than a 7% p/a interest rate, applied monthly, to todays average mortgage? People are paying thousands more per month now in mortgage payments, compared to hundreds over the short duration increase in cost of living created by supply shock inflation. I would rather pay 7% more on food+utilities a month, for a couple of years, than 7% on my mortgage per month for the same period or longer.
Ultimately it would be cheaper for the government and the economy as a whole to supplement the poor and low incomes during that inflationary shock period, than have the banks suck all the liquidity out of the economy, killing said economy(businesses and jobs) for the better part of a generation(because whether we are willing to admit it yet or not that is what the coming recession/depression will do).
The extreme imbalance between the costs and effects of these two choices are stark, and I cannot see this whole drama as anything other than an obfuscation used for a massive transfer of wealth and a way to pressure and rein in rebel nations.
Please share what inflation was costing you each month compared to what the mortgage rate increases are now costing you. I would love some solid examples of which is better or worse.
$500 million. That sounds like a lot. But we've seen what futility looks like in the past, and how defenceless we can be if we aren't careful.
Andy Krieger had come to Bankers Trust (*where John Key would work) from Salomon Brothers. He rapidly gained a reputation as one of the world’s most aggressive dealers and had a trading limit of $700 million.Krieger became increasingly convinced that the New Zealand dollar was vulnerable. Because he had a huge trading limit and then could use high leverage on top of this by trading currency options – as high as 400:1 – he was able to bring a staggering amount of money to bear on the Kiwi dollar. His short position was so large that he claimed it exceeded New Zealand’s money supply. Let’s say that again – he controlled more New Zealand dollars than the number of New Zealand dollars in circulation. The reaction of the New Zealand dollar was immediate and catastrophic. The currency fell 5% against the greenback in a few hours, allowing Krieger to turn a profit of $300 million for Bankers Trust in a blink of an eye.
It won't make a blind bit of difference. We are here because ALL sides of our political spectrum have put us here over the last few decades. They ALL do (on more precisely, don't do) the very same things, and will keep doing so until The Financial Market does what it always does - fix things.
$500 million is an utter joke. In case of persistent weakness of the currency, it would not last a week at the very, very best. The only way to defend a currency, and even this option does not always work, is to significantly increase interest rates.
We are governed by complete muppets.
I know I keep banging on about this but been saying before that the OCR is going nowhere until at least Christmas. The government here are getting nervous because it looks like the FED will have to keep hiking, possibly with a nasty jump and the blowback will not be good leading into our election.
With NZD tanking inflation will continue to remain well above the 2% mandate. We import way more than export, 500 million to protect currency once currency sharks smell blood this will last a couple of days people should expect NZD to become much weaker, and OCR to be raised very soon.
We import way more than export
This won't change if we keep living in la la land. We cannot magic up exports just like we cannot magic up houses. We can choose to buy less from overseas anytime we like. Just like we chose to stop immigration during covid. I don't see people complaining about pay rises, I see people complaining that houses cost so much compared to their wages...
I think things are about to get interesting. Massive US Debt issuance will be pushing their Treasury yields ever higher, causing our currency to trend lower, theirs to rise. Guess what, imported inflation will require defence by RBNZ, not only in on market currency purchases but even higher interest rates. This 500m is in anticipation of this? Interest rates are not coming down any time soon.
Watch this space as things have the potential to get quite ugly from here.
Yeah. Our only saving grace is an election due soon and Luxon who has experience of making hard calls to defend a balance sheet.
Much as i dislike his love of property investment (unfortunately its about the only thing we can recover quickly). i would trust him to slash the nicetohave big projects, slash government overheads and help businesses to prosper overseas ... and to cut out the nice to have dual healthcare systems, multi lingual signs, gang kindness.. (i dont disagree with the ideas completely - but when child poverty and obseity and joblessness is so rife i dont see a justification to spend hundreds of thousands on dual language signs - when the current ones do their job ok.. rather young kids have food, clothes and a decent education thanks)
Much as i dislike his love of property investment
Unfortunately thats the biggest problem in this country. Soon he will give the land-lords another $300 million an year , tax-deduction on their income tax.
Imagine a colleague sitting sitting next to me; earning the same salary - but he pays $10k less on his income because he has (or able to show) negative gearing properties . And later when he sells this property no capital gain tax on this ? How unfair
That colleague is carrying the interest rate risk on a big debt, bad tenants etc, it isn't the free ride that critics claim it is. Also to be able to claim a deduction the property would now have to be a new build, so adding to the housing stock and helping address the housing shortage.
Property investing isn't the wealth creation vehicle it once was, I'd view it more as an inflation hedge at the moment, and only any good for that if one can keep up with interest payments.
Also to be able to claim a deduction the property would now have to be a new build, so adding to the housing stock and helping address the housing shortage.
Not sure about this one. Is this part of currently govt policy ? Or is that what national promises - negative gearing only for new builds ?
See this quote from the other interest article today(https://www.interest.co.nz/public-policy/123430/nicola-willis-says-she-…)
Another tax cut would be reinstating interest deductibility for rental properties. Treasury forecasts this would cost $490m in 2024 and $650m in 2025.
I don't think all these $650 million is for new builds alone.
And fair enough - all the risk and bad tenants and sacrifices and what not .. all these should be contained within his business . Why there should be tax benefit on his other income ? There must be a history on that - but I think it is unnecessary . $650 million spending for the 'sacrificing' landlords is too much
City underground rail, skypath that wasnt, 3 waters, new IT for benificiary department, rail to airport, working insurance that wasnt, dual healthcare by race, multi lingual signs, merge tv and radio, i think they increaed the numbe rof govt staff by 100% or so, i hatetothink how many consultants extra .. kiwibuild that didnt... increase in bemefits (that went str8 to supermarket owmers and landlords).
Lets get a list of their capex spend and have a laugh at how none of it actually benefitted annyone as it all went str8 to the rich. Much easirr and cheaper to cut taxes for wealthy .... and then they will reinvest it in business so the notwealthy actually get a chance..
MMT has the answer of course.
True. As MMT explanation on govt spending matches with the RBNZ document 'Money creating in New Zealand", they still talk a spending 'hole' ?
National leaves door open to China funding new New Zealand roads (msn.com) ??
"The National Party now appears to have a $10 billion hole in their transport policy," said Prime Minister Chris Hipkins.
Remember similar $11Billion hole talk in 2017 between Joyce and Robertson ? They were arguing with a wry smile knowing that they talk about something they don't want people to know..
This smells like a coordinated signal that the OCR won't be raised when it should. Que $500mil to paper over further falls in the NZD. Signs of protecting the banking fueled ponzi ahead of tax payer interests.
From a labour govt this is beyond shameful. They deserve eradication this election.
500 million is a tiny amount. How many billions are they paying for the teachers pay rise and where are they going to find the extra money from, when they couldn't afford to pay increases previously. I think over 80% of the public doesn't have a clue on what goes on and how these things work.
Please check this document from RBNZ. https://www.rbnz.govt.nz/-/media/518b0156a77949d08cfee13723f98974.ashx
A Fig 3 in Page 3
Government can spend to increase the money supply
When government borrows ( bonds ) it reduces money supply
When government pays off debt , it increases money supply
So as long as resource capacity and needs met, government can spend. Both no-one want to discuss
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