RBNZ gradually reduces foreign currency holdings to NZ$4.2 bln

The Reserve Bank of New Zealand has reported in its Statement of Intent for the 2009/10 financial year that its holdings of foreign reserves have fallen to NZ$4.2 billion by April 30 from NZ$4.4 billion at June 30 last year. The Reserve Bank intervened in the foreign exchange markets in June 2007 to sell New Zealand dollars to drive down a currency approaching 80 USc at the time. The Reserve Bank kept buying through 2007/08 as the currency hovered around 80 USc, but some market watchers have wondered if the Reserve Bank would look to close out that position and 'buy back' New Zealand dollars. The currency has since dropped to as low as 49 USc, but the Reserve Bank has argued the recent rise in the currency back to 65 USc was above its own expectations and had tightened monetary conditions.

Since 2007, the Bank has held a portion of its foreign reserves on an unhedged basis as opposed to the historical approach of holding foreign reserves fully hedged. This has been achieved by funding part of the Bank's foreign reserves using New Zealand dollar liabilities rather than foreign currency-denominated loans. As a benchmark, the Bank will hold (Special Drawing Rights)  SDR 1.0 billion unhedged foreign reserves with the ability to hold more or less than the benchmark over the exchange rate cycle. At 30 June 2008, the Bank held a net open foreign currency position of SDR 2.1 billion (NZ$4.4 billion), higher than the benchmark amount. During the 2008"“09 financial year, the Bank has gradually reduced its holdings of unhedged foreign currency reserves. At 30 April 2009, the Bank had an open foreign currency position of SDR 1.6 billion (NZ$4.2 billion).

The bank also disclosed its balance sheet had grown substatially because of the introduction in late 2008 of new lending facilities to banks in exchange for residential mortgage backed securities.

The Bank's balance sheet has changed significantly since the last Annual Report was prepared. As at 30 April, total assets were $29 billion, up from $25 billion at 30 June 2008.The main drivers have been: * NZ$600 million capital injection. On 2 July 2008, the Bank received a capital injection of $600 million from the government to provide sufficient cover for potential mark-to-market losses on the Bank's government securities portfolio. * New liquidity management facilities. The Bank introduced new liquidity facilities during the year aimed at supporting New Zealand dollar liquidity in the event of global market disruptions. The range of acceptable securities for domestic market operations has been progressively expanded and now includes residential mortgage-backed securities and asset-backed securities. * In addition, the Bank has recommenced issuing Reserve Bank bills as a tool for managing the level of New Zealand dollar liquidity in the banking system. These changes have added about NZ$7 billion to assets and liabilities reported on the Bank's balance sheet at 30 April 2009.

The bank forecast its operating surplus would almost halve in 2009/10 to NZ$127.5 million from NZ$259 million in 2008/09, largely because of lower interest rates. The Reserve Bank also noted that it faced "an enormous challenge in the inflationary risks once confidence returns to normal in global markets when there is so much liquidity around." Elsewhere, the Reserve Bank announced it would establish a small Auckland office "to provide backup for essential payments and financial markets operations in the event of a physical disaster in Wellington." It also noted in its 'issues' section that the quality of NZ$5 notes in circulation was falling below the desired quality standard. Operating spending would increase to 6% to NZ$55.1 million in the coming year to pay for the expansion of the Bank's regulatory responsibilities for non-bank financial institutions, the costs of establishing a new office in Auckland, and depreciation of new systems. The bank noted that it forecast net operating spending would be NZ$47.3 million against the NZ$46.9 million provided for in its Funding Agreement with the government. The additional $0.4 million of expenditure in 2009"“10 will be drawn from underspending in the previous four years of the Funding Agreement. At 30 June 2009, the cumulative underspending of the current Funding Agreement is forecast to be $11.2 million. Your views and insights? We welcome comments and any further insights on this article and its source documents in the comments field below. Or if you want to remain under the radar please email bernard.hickey@interest.co.nz and we'll be in touch. We practice a form of collaborative journalism that aims to include the insights and expertise of our readers to improve our articles. That includes clearly identifying any errors and correcting them. We also update articles with relevant new information and commentary and will label our articles Update 2 etc. We know we don't know everything and we know we're not always right. We appreciate your help in constantly improving and deepening the knowledge and debate on interest.co.nz.