is our economy rebalancing? there has been a lot of discussion about the big global imbalances that had been allowed to develop over the last decade, and the extent to which they contributed to the global financial crisis. more importantly we are all keen to see how much global rebalancing is now underway with the recovery. so far the answer is that some rebalancing has happened, but it is still quite unclear whether this will be lasting or sufficient. what about new zealand? here we are seeing strong improvements in export prices, but they are not yet translating into strong domestic consumption or strong investment. instead households and businesses are using extra income to stabilise their balance sheets. in assessing the state of balance of the new zealand economy, we might view it through four different lenses : funding imbalances for banks, fiscal imbalances on the government account, savings imbalances on the household account, and external imbalances. these are all inter - related, though in complex ways. funding imbalances – australasian banks have relied heavily on short term foreign funding, and that proved a vulnerability in the crisis. for that reason we have put in place a liquidity policy requiring banks to hold longer - term foreign funding plus retail deposits to meet an increasing core funding ratio. that has already contributed to longer duration funding. this recently proved its worth during the greek crisis when there were renewed signs of fragility in international funding markets. fiscal imbalances – the greek crisis also focussed attention on to government funding deficits. the global financial crisis led to many governments assuming the costs of rescue packages and the risks of the financial sector more generally, during the recession at a time when their tax revenues were falling and social expenditures rising. the result has been some very unattractive fiscal deficit positions and forward projections that will strain available funding. the markets have focussed on cases like greece with no independent exchange rate or monetary policy. however as the bank for international settlements shows, the issue of fiscal sustainability goes much wider. they show rapid growth in public debt to gdp ratios for the next 30 years, even under an assumption of fiscal retrenchment, resulting in interest payment to gdp ratios that could go as high as 20 percent or more. many oecd countries would need to run at least 2 – 3 percent budget surpluses consistently for several decades just to stabilise their public debt ratios at pre - crisis levels. the new zealand fiscal accounts

unclassified new zealand ’ s monetary policy implementation framework speech delivered to kanganews new zealand debt capital market summit 2022 by karen silk, reserve bank assistant governor 7 september 2022 ref # x750533 v3. 4 introduction1 e nga mana, e nga reo. e nga karanga maha o te wa. tena koutou, tena koutou, tena koutou katoa, it is great to be here with you all today. i would like to start by acknowledging kanganews for their continued support of new zealand ’ s capital markets and for hosting today ’ s event. i would also like to acknowledge my colleagues who have given an address at this forum over the last two years, covering the changes to the composition of our balance sheet during the pandemic, 2 as well providing an overview of the key strategic drivers of our balance sheet into the future. 3 this speech builds on what was covered in those addresses, with a focus on our monetary policy implementation framework. today, i will talk about two aspects of this monetary policy implementation framework : first, i will outline the changes that we needed to make during the pandemic in order to implement monetary policy effectively ; and second, i will talk about how we plan to use this framework into the future. there are four key messages i wish to convey in this speech : our current monetary policy implementation framework is operationally simple, and provides flexibility for changes in the level of settlement cash. the purpose of settlement cash is to provide for the payment and settlement needs of the banking system. the level of settlement cash is a by - product of, and matching liability to, policy tools on the asset side of our balance sheet. change to the settlement cash level is not meaningful for the stance of monetary policy, so long as the level is sufficient for payment and settlement needs and balances are remunerated at the official cash rate ( ocr ). our monetary policy implementation framework is what we use to ensure that short - term interest rates trade at levels that are consistent with the ocr. the ocr is the interest rate set by the monetary policy committee ( mpc ). it influences the price of borrowing money in new zealand and allows us to influence the level of economic activity and inflation. 4 it is important to state upfront that the implementation of monetary policy is operational and distinct from the stance of monetary policy, which is determined by the mpc. the stance