tomorrow ’ s central bank balance sheets do – and what should we leave to financial markets? some principles for good parenting [ speech ]. oxford conference on ‘ the financial system ( s ) of tomorrow ’, said business school, university of oxford, united kingdom. new zealand ’ s monetary policy implementation framework unclassified ref # x750533 v3. 4 to anchor short - term interest rates, we will need to ensure that settlement cash does not become scarce. this means that the level in the future will be above the minimum amount of settlement cash needed for payment and settlement needs. if settlement cash becomes scarce, we may see upward pressure on short - term interest rates. as well as monitoring short - term interest rates, usage of our facilities and uptake of our operations can provide useful information. for example, frequent usage of our overnight reserve repo facility – where eligible counterparties can access settlement cash at the ocr plus a spread on a collateralised basis – would be a sign of scarcity. the reserve bank has a wide range of tools available to inject and withdraw settlement cash, and is able to deploy all or any one of these, depending on where demand or stress is coming from. staff will continue to carefully monitor money market conditions, usage of our facilities and operations, and the distribution of settlement cash across banks, to ensure that the transition to a lower level of settlement cash proceeds smoothly. the reserve bank will regularly review the operational design of our facilities, based on usage, financial market conditions, and market feedback, to ensure that short - term interest rates trade around the ocr. as well as reviewing our facilities, the reserve bank will continue to consider the optimal mix of tools and operations to ensure short - term interest rates are anchored, within our floor system of monetary policy implementation. conclusion to conclude, the amp tools employed during the covid crisis increased the size of the reserve bank ’ s balance sheet. on the liabilities side, this resulted in a by - product of high settlement cash. this quantity of settlement cash does not impact the implementation of monetary policy under a floor system. this is because, above a sufficient level of settlement cash, short - term interest rates are anchored by all esas balances being remunerated at the ocr. it is only if the amount of settlement cash falls below a sufficient level that it will have a material impact on short - term interest rates. this is different to before covid, when, under the corridor

since september 1988, and indeed on average over that whole 12 year period, the new zealand dollar has been somewhat less volatile than any of those currencies. looking at the big exchange rate swings which made life difficult for exporters and those competing with imports at some stages during the last decade, we compared the size of the exchange rate appreciation from trough to peak for each of the same currencies. we found that the maximum appreciation which the new zealand dollar experienced during the decade ( measured on an inflation - adjusted, trade - weighted, basis ) was, to be sure, at 29 per cent rather greater than that experienced by the australian dollar ( at 20 per cent ), but was closely similar to the maximum trough - to - peak appreciation experienced by the german mark ( 27 per cent ), the united states dollar ( also 27 per cent ) and the british pound ( 31 per cent ), and very substantially smaller than that experienced by the japanese yen ( 62 per cent ). in other words, as i have indicated on other occasions and contrary to much current mythology, the big exchange rate swings experienced by the new zealand dollar during the nineties were not in the least unusual by the standards of other currencies. this suggests rather unambiguously that, while currency union would eliminate nominal exchange rate uncertainty for new zealand traders trading within the currency union, there is no currency which we could adopt which would eliminate big exchange rate swings against countries outside the currency union. and since new zealand ’ s trade with australia amounts to little more than 20 per cent of the total, a currency union with australia would still leave most of our exporters facing currency uncertainty. in other words, currency union with australia would buy nominal exchange rate certainty for those handling little more than 20 per cent of our trade ( perhaps especially those in the manufacturing sector ), while leaving those handling the other 80 per cent of our trade still facing such uncertainty. and i say currency union would buy some traders “ nominal exchange rate certainty ” to make it clear that currency union would not buy anybody real exchange rate certainty, or in other words, certainty of a constant exchange rate after inflation has been taken into account. this is something which hong kong has discovered over the years. although it has had a currency which has been tightly tied to the us dollar since the early eighties, its real, or inflation - adjusted, exchange rate has appreciated quite strongly, both because the us dollar has appreciated against most other currencies and because hong kong