The current monetary policy of the reserve bank of New Zealand operates by considering the use of interest rates and the sale of government securities. Monetary policy means varying the price and supply of money circulating. It is more flexible than fiscal policy since changes can be made at any time. In addition, the effects are less obvious. The two monetary measures are designed to reduce total spending by raising the cost of borrowing and limiting the availability of loans. The money supply comprises mainly bank deposits and monetary controls are intended to regulate this major form of money (Baumol W, 1992). Controls are applied by the reserve bank of New Zealand. The reserve bank uses open market operations that are the use of special deposits and directives. This is aimed to reduce investment and consumption by making finance more expensive and difficult to obtain. Open market operations consist of selling or buying government securities by the reserve bank on the market. If the bank sells securities, buyers pay using a cheque drawn on the commercial banks. The balances of the commercial bank at the bank, will, therefore, be reduced and if the reserve assets ratio is to be maintained, then bank advances must be reduced (Waud R.,1997). Funding is an aspect of open market operations. It means lengthening the age structure of the national debt by issuing less short–term debt that is the sale of treasury bills through the discount houses and more long-term or funded debt. In this way, the reserve bank can alter the banks’ opportunities to purchase liquid assets, because treasury bills are easily converted into cash. Thus, if the bank wishes to decrease the money supply, the sale of treasury bills is restricted by converting the desired amount of short-term debt into funded debt. Consequently, the banks must seek alternative liquid assets to reduce deposits( McTaggart D Finlay C & Parkin M. 2003). A drawback to the effectiveness of this process is that the banks may maintain their liquidity by increasing their holdings of commercial bills. These bills are bought from discount houses and are just as liquid as treasury bills (Baumol W, 1992). Special deposits:- The drawback can be overcome to some extent by using special deposits as a form of control. The central bank can call for special deposits equivalent to a given percentage of the commercial banks’ total deposits. These special deposits do not count as part of the liquid assets and so, to raise them, the banks have to call in some part of other advances. Issuing directives open market operations and calls for special deposits are insufficient in themselves to achieve full control over bank advances. For example, instead of reducing their advances, the banks may prefer to sell their investments. Therefore, the central bank may supplement its action by issuing directives to restrict loans (Waud R. 1997). Reserve bank of New Zealand rate is used to influence rates of interest and hence, the cost of borrowing. Technically, the bank rate is the minimum rate at which the central bank is prepared to re-discount bills of exchange brought to it by members of the money market. However, the chief importance of bank rate re