. it is not just to traditional businesses, or any one party. easily said, harder to do without a clear desire to work together over an agreed horizon. the reserve bank is working on a few long - term projects itself to ensure that our financial 3 / 5 bis central bankers'speeches system is more resilient to economic slowdowns. our annual report will be made public on monday, outlining a wide range of investment activities. most importantly, we are acting to ensure new zealand remains less susceptible to short - term, sometimes only fair - weather, funding that creates pockets of excess debt and exacerbates economic cycles. we acknowledge that our actions at time may look confusing to the casual central bank observer. on the one had we have set low interest rates to deliberately encourage investment and spending, which may be funded with higher debt. this is how monetary policy works. on the other hand we are saying we are concerned about some pockets of debt – especially in some highly leveraged households ( residential mortgages ), and in some pockets of dairy farming ( rural lending ). so how can we achieve more investment and more resilience at the same time? the good news is we have more than one tool at the central bank, and these tools work over different horizons and achieve different purposes. for example, by now you should all be aware of the reserve bank ’ s capital review proposal. our proposals would see significant increases in shareholder capital in banks. with banks having more of their own ‘ skin in the game ’, the owners will sharpen their long - term customer focus, and it will reduce the chance of a bank failure and the cost on society as a whole should a bank fail. these outcomes are highly desirable for the long - term economic health of new zealand, and should promote deeper and more liquid local equity and debt markets. we finalise our decisions in early - december this year. whatever our final decisions, we will be insisting on transition to higher capital at a sensible pace. but we will be talking more and better quality capital. how have some lenders ( banks ) responded to date? many of the large banks have spent the past 10 or so years lending aggressively to households and the dairy sector during the good times. they have also spent the last 12 months or so revisiting this wisdom, and have been raising their lending margins and / or making credit much harder to access for some customers – especially rural customers. such bank activity is pro - cyclical

banks are well practiced in responding to. but there are also structural factors dampening inflation pressure and / or altering the impact of lower interest rates on investment and spending. some examples of structural changes include the changing nature of how we produce goods and services, with more reliance on global technology which is often delivered by a handful of global suppliers at single global prices. we are also producing more services, rather than physical goods as a proportion of total output, reducing our relative reliance on capital equipment and reducing our sensitivity to the cost of investment. production locations are also mobile, and labour is highly mobile internationally, making wage bargaining harder even if there are domestic labour shortages. and, populations are ageing, as people live longer, leading to different preferences to save rather than consume. by definition, these structural factors are slow moving, meaning they will anchor the historically low interest rates for some time to come. meanwhile, central banks will continue to vary policy rates in response to cyclical factors, but rates will vary from a lower average, and possibly within a lower range than in the past. in new zealand, for example, we believe the neutral interest rate – the ocr that is neither contractionary nor expansionary for the economy – has drifted lower in recent decades. this is from a mid - point estimate of around 5 percent in the early 2000s, to around 3 percent today, with plenty of uncertainty around these mid - points. the obvious challenge for many central banks, including us, is that the decline in the neutral rate means we have less room to manoeuvre our policy interest rates without concern for the zero per cent lower bound. what happens if we hit zero? should the ocr go negative, and / or should we embark on direct asset purchase programme, and what other monetary policy strategies 2 / 5 bis central bankers'speeches could be implemented? we are currently thinking hard about these questions, because it makes sense to do so as a precaution – it ’ s best to put the roof on when the sun is shining. our current view is that we are unlikely to need ‘ unconventional ’ monetary policy tools. but we would be remiss not to be prepared. we are in a good position to learn what to do, and not to do, from other central banks globally. of course, one size does not fit all. new zealand is a small, open, economy with a floating exchange rate, and a concentrated banking system. hence, we need to tailor our own pre