The Government of New Zealand has provided the central bank with more capital and an indemnity, bolstering its ability to intervene in the foreign exchange market when needed. Further stated by the Finance Minister Grant Robertson has decided to inject NZ$ 500 million ($300 million) into the Reserve Bank of New Zealand (RBNZ) following recommendations from the Treasury, according to a report dated 19 May. The report made public a week ago, stated that the injection would occur on or shortly by 1 July.
Agreement between the bank and the government
The Treasury further stated in said report that “the bank’s current level of foreign exchange reserves for intervention have been updated to reflect the growth in the New Zealand economy and global financial markets and may no longer be sufficient in some scenarios,”.
The action came after RBNZ and Minster Robertson reached an agreement on the adaptation of a new foreign reserves framework in January, in which there will be an increase in the country’s foreign reserves. In case of market dysfunction, the new framework will also provide the RBNZ with the ability to intervene in the foreign exchange market. Unlike in the past, when the central bank would seek approval from the finance minister to conduct FX in order to intervene
Since 2007, New Zealand’s foreign reserves have been largely untouched, according to the central bank. It is believed by the RBNZ and the Government that further expansion of the economy and the FX market means that there will be a need for a larger pool of reserves to draw upon in times of crisis.
Indemnity grant
Meanwhile, the Government has further agreed to grant an Indemnity to the RBNZ. The Treasury report did not disclose the size of the indemnity but further stated that it would be able to cover potential foreign exchange losses using hedged foreign reserves in the event that the central bank conducted a significant intervention. However, such situations are rare and thus the indemnity will only be activated in certain events.
Providing that the RBNZ still has extra capital, the indemnity does not create additional costs to the Government or even affect the country’s net debt. However, the central bank will be able to take further risks due to the financial support. The Government will then receive the losses and gains arising from said risk.
In conclusion, the agreement between the Government and the Central bank is born from the need for the country to adapt to future financial and economic changes. The Treasury further supported said action by stating that such actions are based upon the growth of New Zealand’s economic growth.
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