RBNZ FX Intervention Reserves To Be Updated

The NZ Treasury in coordination with modelling from the RBNZ has decided to give the central bank more capital and an indemnity to allow it to increase its capacity for FX intervention if needed, according to a report to Treasury quoted by Bloomberg. The sizes of the increase in FX reserves and indemnity have not been disclosed but Treasury added NZ$500mn to the RBNZ’s balance sheet in July.

• Reserves have not been adjusted since 2007 and due to the increased size of the economy and financial markets they need to rise for the RBNZ to be able to respond to events to support the central bank’s objectives. Governor Orr said in January that an increase would occur over a number of years to reduce the impact on markets.
• The decision to build reserves and provide the indemnity is to allow for FX intervention while reducing the chance of the RBNZ ending in low or negative equity if there is a currency loss. The indemnity means that the RBNZ can “effectively “short” foreign currencies” but these events would be “rare”, according to the Treasury.
• Increased reserves allow the central bank to take on more risk which would only impact Treasury if there are losses or gains from intervention.
• The reserves framework will be reviewed every 5 years. See report here.