The RBNZ's monetary policy tools
By setting interest rates to keep aggregate demand in balance with the supply capacity of the economy, the RBNZ acts to keep consumer price inflation low and stable and to support maximum sustainable employment.
The RBNZ has a range of monetary policy tools at its disposal to influence interest rates – and hence demand – in the economy. The RBNZ also has tools to help promote financial stability.
The most significant tools used by the RBNZ to achieve our monetary policy goals and promote financial stability are outlined in Table 1. The RBNZ’s policy tool kit has evolved and expanded over time, in line with financial innovation and changes in the economic context in which we operate.
The choice of which tool to use at any given time depends on the economic context and the principles being adhered to by RBNZ policymakers. The principles used to select the most appropriate monetary policy tool to use at any given time are outlined in Table 2. The economic context determining the choice and calibration of a monetary policy tool is regularly outlined in Monetary Policy Statements and associated communications. We operate transparently to ensure that the economic context and principles driving the choice of tool are publicly understood.
Table 1: A selection of Monetary Policy and Financial Stability tools
| Monetary Policy and Financial Stability Tools | Purpose | Introduced |
|---|---|---|
| Official Cash Rate (OCR) | Influencing short-term interest rates in the economy, impacting financial conditions for households and businesses. | 1999 |
| Liquidity Policy | Ensuring banks have sufficient liquidity buffers to withstand a loss of funding. | 2010 |
| Macro-prudential policy (LVR speed limits) | Ensuring there are limits on riskier mortgage lending on bank balance sheets. | 2013 |
| Revised Capital Policy | Ensuring banks have adequate capital buffers to withstand losses. | 2019 |
| Large Scale Asset Purchases (LSAP) | Influencing liquidity and longer-term interest rates in the economy, impacting financial conditions for households and businesses. | 2020 |
| Funding for Lending (FLP) | Influencing bank funding costs and lending rates, impacting financial conditions for households and businesses. | 2020 |
Table 2: Principles determining the selection of Monetary Policy tools
| Principle | Description |
|---|---|
| Effectiveness | Tools are designed to provide a strong influence over inflation and employment, to ensure the monetary policy objectives are achieved. |
| Efficiency | We take into account the distortionary impact of the tools on the efficient allocation of resources within the economy, including between various groups and sectors of the economy. |
| Financial system soundness | We take into account the impact of the tools on financial system risks, to avoid the costs of financial crises. |
| Public balance sheet risk | We take into account the financial risks that the tools create for the Crown’s and our balance sheets, to protect public funds and central bank independence. |
| Operational readiness | Use of the tools take into account the operational readiness of each tool, to ensure the transmission channels function as expected. This includes our readiness to implement each tool and the readiness of financial markets and the New Zealand public to respond appropriately to the tools. |
The Official Cash Rate (OCR) is the main tool used by the RBNZ to influence interest rates. This is the overnight interest rate (price) that the RBNZ pays banks on the cash balance in their transaction accounts at RBNZ.
As well as controlling the OCR, the RBNZ can also influence other short-term interest rates in the economy by changing the level of cash (or liquidity) available in the financial system. This is done by buying or selling other financial assets, which effectively amounts to swapping RBNZ cash for somebody else’s asset. These tools are called ‘quantitative tools’ in that they influence the quantity of cash in the system. However, as with the OCR, the aim of using these tools is still to influence the level of interest rates (price) in the economy.
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