with section 204 ( 1 ) of the act achieving the financial stability objective acting in a way that furthers the objectives or purposes of the prudential legislation acting as a prudential regulator and supervisor under the prudential legislation. the reserve bank board must have regard to the financial policy remit when acting in relation to prudential strategic intentions and standards, as set out in section 49 of the act. matters specified in accordance with section 204 protecting and promoting financial stability can have implications for the government ’ s broader policy objectives and the wider economy. it is desirable for the reserve bank to have regard to the following matters. the government ’ s desired outcomes for the financial system it is desirable to have a financial system that is strong, efficient and inclusive, with a low incidence of failure of entities regulated by the reserve bank. resilience as a pathway to prosperity unclassified unclassified within the appetite of a low incidence of failure, a competitive financial system should be encouraged so as to best ensure ongoing financial efficiency and inclusion. in this respect, the reserve bank should have regard to the benefits of : imposing regulatory and supervisory costs that are proportionate to the expected risks and benefits to the financial system and society ; encouraging new investment and financial innovation that raise the productive potential of the economy ; and encouraging the allocation of financial resources in a way that maximises the sustainable longterm growth of the new zealand economy. if a regulated entity does fail, the reserve bank is expected to manage the failure in a manner that minimises the costs of failure and disruption to the broader economy, and prioritises protections for vulnerable consumers, depositors and public funds. other government policy priorities the minister also considers it is desirable for the reserve bank to have regard to the following matters. housing the government has a policy objective to support more sustainable house prices, including by dampening investor demand, which would improve affordability for first home buyers. this is part of the broader government policy statement on housing and urban development, which provides a vision that everyone in aotearoa new zealand lives in a home and within a community that meets their needs and aspirations. climate change the government has a priority of building resilience and facilitating adaptation of new zealand ’ s economy, society and environment to climate change. it is important that the financial system continues to play an appropriate role in supporting community wellbeing and resilience as it responds to that transition and increases in underlying risks as a result of climate change

well above its historical average since 1964. when the new zealand dollar is either high or low, it tends to remain high or low for longer than the exchange rates of other countries. so in the current situation, not only is it clear that the real exchange rate is high, it is also likely that this elevation will persist for some time. a relatively accessible example of the bank ’ s research on the exchange rate was a conference we held ( jointly with treasury ) earlier in the year. copies of all the papers from this conference are available at http : / / www. rbnz. govt. nz / research _ and _ publications / seminars _ and _ workshops / mar2013 / programme. html. on a trade weighted basis and against the major currencies involved in new zealand dollar transactions ( other than the australian dollar ), our exchange rate is currently in the top decile relative to historic experience. bis central bankers ’ speeches what are the drivers of the real exchange rate? we can think about what drivers the exchange rate in a couple of ways. one is the cyclical dimension of the exchange rate and the other is the long term level. the reserve bank has models that are able to explain a good proportion of cyclical fluctuations in the exchange rate. 3 these models typically highlight the correlation between the exchange rate and a few key variables, such as the terms of trade, interest rate differentials, relative house price inflation, and measures of risk. of course, one should never confuse these correlations as causal explanations of the exchange rate. figure 2 illustrates how the cyclical movements in the three most important variables used in one of these models can explain a large proportion of exchange rate fluctuations. 4 even though we can explain the cyclical movements in the exchange rate these movements may not be welcome by the tradables sector because, among other things, it adds uncertainty to decision making. that said, short term exchange rate volatility can be effectively countered through the use of forward exchange rate contracts, but it remains true that longer term exchange rate cycles are more difficult to handle for many exporting firms. for examples see mcdonald, c ( 2012 ) “ kiwi drivers – the new zealand dollar experience ” an 2012 / 02 and cassino e and z wallis ( 2010 ) “ the new zealand dollar through the global financial crisis ” rbnz bulletin september 2010. for specific details see mcdonald, c ( 2012 ) “ kiwi drivers – the new zealand dollar experience ” an 2012 / 02.