monetary policy : same objectives different challenges speech delivered to the victoria university of wellington school of government on 2 september 2020 by adrian orr, governor with special thanks to colleagues omar aziz, cameron haworth, and joseph weller embargoed until 2 september – time 12. 30pm 2 the terrace, po box 2498, wellington 6140, new zealand telephone 64 4 472 2029 online at www. rbnz. govt. nz introduction tena koutou katoa, welcome everybody. today i want to outline how the reserve bank of new zealand – te putea matua – is working to maximise the effectiveness of its actions in the face of the global covid - 19 pandemic. while we all hope the health implications of the virus will be as short - lived as possible, it is clear that the economic implications will be severe and long - lasting. it is during such unsettling times that public confidence in our financial system matters most. i want to assure people that the goals of the bank remain the same, as set in legislation. our purpose is to ensure public confidence in the financial system, and to minimise the economic vulnerability of new zealand through a sound and dynamic monetary and financial system. i also want to assure people that the bank ’ s core values – integrity, innovation, and inclusion – remain our bedrock and continue to assist greatly in managing ongoing changing economic times. to succeed we continue to exercise sound judgement and work collaboratively to be most effective. and, consistent with our value of innovation, the bank ’ s activities, capability, and capacity continue to evolve with the circumstances. during these times of covid - 19 our values have ensured te putea matua has been able to respond effectively to the many new – sometimes unprecedented – economic challenges. we have been able to, for example : exercise decision making under extreme economic uncertainty, using a least regrets approach for the current context ; collaborate with the government, our regulator colleagues, and our regulated institutions, to prioritise actions, coordinate and communicate policy decisions, and urgently implement agreed actions ; review our strategies and the tools available to implement monetary policy in the most effective and efficient manner, in full line of sight of any different risks that we may need to manage or mitigate ; and test our understanding of the interaction between our monetary policy goals – of low inflation and contributing to maximum sustainable employment – and our financial stability and efficiency goals. these goals remain mutually supportive. since the beginning of this pan

as mark - tomarket asset valuations and provisioning rules for loan losses. another area to receive attention under basel 3 is the possible use of macro - prudential policy adjustments to help counter pro - cyclical behaviour in financial systems. the bcbs has proposed that banks be required to build up additional capital buffers at times of rapid credit growth that could then be drawn down in times of stress. the intention of the instrument would be to lessen the impact on the economy when the boom turns to bust as well as possibly constraining excessive credit growth. a number of central banks, including the rbnz, are also looking at other macro - prudential tools that could possibly be used to help limit the extremities of the credit cycle. the challenge here is to find instruments that will actually work without imposing major efficiency costs on the financial system. prudential policy : non banks new zealand ’ s non - bank deposit taking sector comprises a number of different institutional types. the savings institutions ( building societies, credit unions and the psis ) have generally weathered the crisis well. the finance company sector, on the other hand, has faced considerable upheaval over the period since 2006, with only about a third of the companies in early 2006 now remaining active. while the global financial crisis added to the difficulties faced by the finance companies, the sector ’ s issues have been largely home - grown as a result of poor lending decisions, particularly with respect to property development lending, and inadequate capital support. while the crown retail deposit guarantee scheme has provided some liquidity protection for the sector, allowing time for the sounder institutions to rebuild investor confidence, the companies that have been unable to recapitalise or restructure have ultimately been forced to exit the industry. an amendment to the reserve bank act in late 2008 saw the reserve bank become the new prudential regulator of the non - bank deposit taking sector ; with trustees remaining the front line supervisors. since then the reserve bank has been developing a new regulatory framework and phasing in the new prudential requirements. key elements include mandatory credit ratings, connected lending limits, an 8 percent minimum capital requirement, and fit and proper tests for senior managers and directors. while these reforms are clearly too late to avert the negative consequences of earlier finance company practices, the overall aim is to raise safety standards in the sector so that the remaining players are more resilient to future business cycles. conclusion the global financial crisis had