balance sheets. while our work is never done, we can take pride in the steps taken. i am confident our financial stability approach has strengthened, the foundations are more solid, and most of all our broader sector and industry engagement stand us in good stead to keep learning from one another. lastly, i want to thank my team and colleagues for the shared endeavour, the wisdom i have gained from them, and the fun we have had together. 1 see our macro - prudential framework 5 / 6 bis central bankers'speeches 2 kahneman, daniel ( 2011 ). thinking, fast and slow. farrar, straus and giroux. isbn 97 - 1 - 4299 - 6935 - 2. david de meza and clive southey, “ the borrower's curse : optimism, finance and entrepreneurship ”, the economic journalvol. 106, no. 435 ( mar., 1996 ) ; adam smith, wealth of nations, book 1, chapter x, p88. 3 the contribution of strong balance sheets to new zealand ’ s economic resilience and recovery from the pandemic 4 supporting sustainable economic growth through financial stability policy 5 i note that apra has just released its final capital review decisions in australia, setting total capital requirements at 18. 25 percent for major banks from 2026, compared with our requirements of 18 percent from 2028. 6 though i note we have made great progress in reducing our foreign liabilities. 7 toby fiennes new zealand ’ s evolving approach to prudential supervisiongeoff bascand renewing the rbnz's approach to financial stability 8 trowbridge - scholtens report 6 / 6 bis central bankers'speeches

are expected to be only partially offset by increases in the prices of housing - related goods and services – things like construction costs, rents, property maintenance, and local authority rates – and increases in cigarette and tobacco prices. in annual terms, these large negative and positive factors have been at play for at least the past year ( figure 1 ). figure 1 : contributions to annual cpi inflation over the past year ppts 1. 5 other cigarettes & tobacco 1. 0 housing & household - related goods & services 0. 5 audio - visual & computing equipment communications 0. 0 air transport - 0. 5 other transport services ( includes acc vehicle levy ) - 1. 0 petrol total annual cpi - 1. 5 sep 2015 dec 2015 mar 2016 jun 2016 source : statistics new zealand, rbnz estimates. annual inflation is expected to return to the lower end of the target band in the december 2016 quarter, as previous petrol price declines drop out of the annual calculations and housing - related goods and services prices continue to increase strongly. stability in the cost of living maintains the purchasing power of new zealanders ’ incomes. inflation that is too high or too low has economic costs, and is of concern to the reserve bank. high inflation distorts the signals being sent from relative price movements, which results in resources in the economy being misallocated. on the other side, low inflation becomes a concern if it leads to the possibility of deflation. although we do not see any significant risk of deflation in new zealand, deflation carries important costs. deflation would likely lead to consumers and businesses significantly delaying purchases or investment, in the expectation that these will become cheaper in the future. by delaying purchases and investment on a large scale, demand in the economy as a whole is reduced. this then leads to even lower prices. deflation is particularly concerning as monetary policy eventually reaches a point where it cannot go any lower in order to stimulate the economy ( known as the effective lower bound ). a buffer above zero inflation is also needed to account for any measurement error in the price index. across inflation - targeting central banks around the world, inflation of about 2 percent per annum is generally viewed as an appropriate medium - term goal. although headline cpi inflation is expected to remain low in the near term, lowering interest rates now would do little to change these outturns. monetary policy operates with long and variable lags. accordingly, monetary policy in new zealand is focused on the medium - term outlook for inflation, as