The Reserve Bank and Finance Minister have agreed a new framework for managing foreign reserves, which will include the RBNZ holding more cash offshore - but it's not saying how much more

The Reserve Bank's going to be getting its hands on more overseas cash.

The RBNZ's announced that it and the Finance Minister Grant Robertson have agreed to a "new framework" for managing foreign reserves. As part of this, the amount held in offshore currencies will increase - but the RBNZ's not telling us by how much.

Robertson has agreed to put more taxpayer's money into the RBNZ upfront in order to fund the increase in offshore reserves. This is disclosed in a December Cabinet paper - but the amount of money to be provided has been blanked out.

In the Cabinet paper  Robertson said because the proposed increase in the level of foreign reserves would increase the risks that the RBNZ's balance sheet is exposed to, the bank is requesting additional upfront financial resources.

"Generally, providing financial backing does not create a direct cost for the Crown, as the Bank's assets and liabilities are consolidated on the Crown balance sheet. To manage financial risk arising from the increased level of reserves, the Bank will require an additional of financial resources. Providing the Bank with additional capital will not directly impact net debt, as the Bank is consolidated within the Crown balance sheet.

"I have considered the different options for providing these additional financial resources, and taken advice from the Bank and the Treasury. At this stage I propose the Crown should provide the Bank with additional capital of [amount deleted], which is sufficient to manage the financial risk on the Reserve Bank's balance sheet from holding and managing the foreign reserves," Robertson said.

Our central bank does advise every month what its foreign currency holdings are and it will continue to do this. The latest figures available - for November 2022 - indicated that the amount of offshore currency holdings had already been increasing. The figures show total foreign currency assets of $17.354 billion at the end of the month, up from $14.482 billion in November 2021.

The more salient figure is the "foreign currency intervention capacity" - effectively the amount of currently available offshore cash - and that stood at $12.216 billion as of November 2022, compared with $11.164 billion in November 2021.

The RBNZ says the total foreign currency assets include: foreign reserves the bank holds if it were to intervene for financial stability or monetary policy reasons, and foreign assets that fluctuate as a result of day-to-day operations for domestic liquidity management.

This means that there can be changes in the data tables that reflect short-term transactions for the purposes of managing liquidity in the domestic financial system, valuation changes or general portfolio management, rather than us actively increasing or decreasing its foreign reserves held for financial stability or monetary policy intervention. The bank says the increase in the foreign reserves for intervention will be evident in the increased ‘foreign currency intervention capacity’ reported in these tables over time.

As part of the framework between the RBNZ and Finance Minister, both parties are required to agree to a level of foreign reserves that should be held "in order to meet our objectives".

According to a statement from the RBNZ, the level of foreign reserves had been largely unchanged since 2007.

"Given the growth in the economy and foreign exchange market since then, the Minister of Finance and our Board have agreed that an increase to foreign reserves holdings is needed," the statement said.

RBNZ Governor Adrian Orr said the transition to this higher level of foreign reserves will take place over a number of years, "in order to minimise the market impact".

"Due to market and policy sensitivities, we do not intend to make public any further details on the size or composition of this increase. However, our foreign reserves holdings will continue to be published on our website on a monthly basis."

The framework maintains the RBNZ Monetary Policy Committee’s right to intervene in the exchange rate when the New Zealand dollar has moved to exceptionally low or high levels that cannot be justified by economic fundamentals.

The RBNZ statement said interventions "are expected to be rare" and consistent with the Reserve Bank’s monetary policy objectives.

"New Zealand is committed to maintaining a free-floating currency. We do not seek to maintain a certain level of the exchange rate and we will continue to only intervene in the foreign exchange market in extreme circumstances to support our policy objectives."

The RBNZ holds and manages foreign reserves in order to be able to intervene in the New Zealand dollar (NZD) market for financial stability or monetary policy reasons. Foreign reserves are safe and liquid assets held in currencies such as United States dollars, Euros, and Australian dollars.

RBNZ chair Neil Quigley says a well-functioning foreign exchange market "is critical to New Zealand’s economy" with many people — including exporters, importers, borrowers and investors — reliant on these markets to exchange New Zealand dollars for foreign currency.

"While foreign reserves are rarely used, it is important for us to be prepared to support the foreign exchange market in exceptional circumstances to maintain financial stability and ensure essential transactions can continue to occur."