yet its smooth operation is essential to the wellbeing of the new zealand economy. banks play a key role in directing funds from individuals who wish to save to individuals who wish to borrow. the system works because people have confidence that funds deposited in banks will be available to them in the future, and that those funds will retain their buying power through time. the reserve bank has a central role in providing the regulatory framework for institutions that wish to describe themselves as “ banks ”. we register banks and we monitor their compliance with a comprehensive financial disclosure regime, required minimum capital adequacy ratios, and limits on the loans they can make to related parties. our framework emphasises the role of bank directors in ensuring that banks effectively manage their risks, and on the role of the market in strengthening incentives for prudent management. this helps to promote a sound banking system. however, no banking system is without risk. depositors still need to make their decisions carefully. banks in new zealand are not guaranteed by the government or the reserve bank. there is no mandatory deposit insurance in new zealand. i mentioned that an efficient financial system needs to have mechanisms by which money can be stored. this is so people can access their money when they need it, without their savings having eroded in value. ensuring that money holds its value is the primary purpose of monetary policy. indeed, by statute the governor of the reserve bank is required to use monetary policy to keep the buying power of the new zealand dollar broadly stable over time. maintaining price stability does not mean keeping the price of each and every item the same. i am charged to maintain a stable overall level of prices, but individual prices are always changing. some things, like computers, will probably continue to get cheaper, while some other things may continue to get more expensive, like martinborough pinot noir. but the overall buying power of people ’ s savings is intended to remain broadly constant over time. in the current policy targets agreement, i am specifically directed to attempt to achieve trend inflation outcomes between 1 and 3 percent. why is this the primary objective of monetary policy? both economic theory and hard experience suggests that money holding its value over time helps an economy achieving its potential. stable money is not a silver bullet, and on its own it can achieve little. however, stable money is one of the building blocks of a successful economy. yes, i could use monetary policy to engineer temporary economic growth. by lowering interest rates i could encourage people to borrow and spend

a least regrets approach to uncertainty : hawks, doves and the white heron ( he kotuku ) by christian hawkesby, assistant governor written with ashley dunstan and ngarimu parata text finalised 15 september introduction for a long time it has become common for followers of monetary policy to categorise central banks as ‘ hawks ’ or ‘ doves ’, and for their decisions to be seen as ‘ hawkish ’ for signalling higher interest rates or ‘ dovish ’ for signalling lower interest rates. in aotearoa, new zealand, our equivalent bird life are the kahu ( the harrier hawk ) and the kereru ( the wood pigeon ). but when it comes to making monetary policy decisions under uncertainty, it may be that the kotuku ( white heron ) provides a much more fitting metaphor. in maori culture, there are two whakatauki ( proverbs ) involving the kotuku that capture how its behaviour must change depending on the environment, outlook, risks and uncertainties : • “ tapuwae kotuku ” refers to taking “ considered steps ”. • “ he kotuku rerenga tahi ” is loosely translated as “ a white heron ’ s flight is seen but once ”, and can also be interpreted more generally as a call that “ once ready, open your wings and commit to flight ”. in this speech, i would like to : • outline the types of uncertainties that we face when navigating monetary policy decisions. • introduce a risk management approach to bring together these uncertainties into our decision making. • illustrate how we applied this “ least regrets ” approach over the past 18 months in response to the threat to our mandate from covid - 19. • reflect on what we have learnt about the economy over the past 18 months during covid - 19, and how this influenced the outlook for monetary policy published in the august monetary policy statement ( mps ). • return to the kahu ( harrier hawk ), kereru ( dove ) and kotuku ( white heron ) to relate this all back into a metaphor for our least regrets approach, and how this helps us navigate uncertainty. however, first, let ’ s start at the beginning, with the bank ’ s purpose and mandate, which ultimately guides all our monetary policy decisions. a least regrets approach to uncertainty : hawks, doves and the white heron ( he kotuku ) purpose, mandate and monetary framework our purpose at