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Wild currency ride pushes Reserve Bank to loss

Tuesday 12th October 2010

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The Reserve Bank of New Zealand reported a loss of $111 million for the year to June 30, thanks to large, unrealised foreign currency losses. The bank reported a $906 million net profit in 2008/09.

However, the loss didn't stop the RBNZ from declaring a final dividend for the government of $290 million, up from $282 million a year earlier, and on top of $45 million paid back in April after the bank decided it had sufficient capital in its balance sheet to handle its financial system stability responsibilities.

"Exchange rate and interest rate movements partially reversed the large unrealised gains of the previous year," Governor Alan Bollard said in the annual report, published today.

"While our reserves are still showing a positive return based on purchase costs, we foreshadowed in the 2009 annual report the likelihood of volatility in accounting profit and loss."

In response to global financial market volatility, the bank has chosen to hold a portion of its foreign currency reserves in an unhedged position, allowing it to sell foreign currency outright without having to buy or borrow foreign currency, should market conditions require such an intervention.

Bollard said the RBNZ had benefitted from being one of the only central banks in the OECD with the full range of financial system responsibilities under one roof, and stressed that the government would soon need to decide whether to extend the deposit guarantee scheme for non-bank deposit-takers past its current expiry date in December 2011.

Also during the year, the bank had begun the task of fundamentally rebuilding its financial and economic statistical systems, with the introduction of a new Financial Sector Information system.

"The first stage of implementation of the FSIS was completed, and we expect to continually improve thescope and usability of this tool," Bollard said.

"The greater accessibility and useof data assists in providing high quality monetary policy advice.

The bank also continued to engage in the international debates over whether prudential supervision tools could play a rolein supporting financial system stability by dampening the impact of economic cycles.

"Our work to date has focused largelyon the role that the new core funding liquidity requirementfor banks may play in helping to dampen credit growth duringan economic upswing. We have also examined the feasibility of additional macro-prudential tools such as the counter-cyclicalcapital buffer which is under active consideration in themajor economies." 

Also under constant review was the potential to augment inflation targetingto take account of the effects of asset-pricecycles, leverage and prudential and fiscal policy on economicactivity and inflation.

At balance date, the RBNZ held total assets of $26.36 billion, and foreign reserves intervention capacity of $11.26 billion.

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