, and can have extensive credit exposure to individual financial intermediaries. i turn now to how the rbnz seeks to manage these risks. new zealand ’ s institutional arrangements are designed to limit the very large financial risk that the central bank could incur from its foreign exchange operations, and also to avoid the bank acquiring substantial contingent liabilities on behalf of the government ( “ the crown ” ) through its liquidity and lender - of - last - resort operations. nevertheless, there is still material financial risk inherent in the bank ’ s operation that is managed through the bank ’ s capital holdings, reserves / asset management, and best - practice risk management. the following sections describe how these arrangements and practices are managed at the rbnz. rbnz institutional and financial arrangements the new zealand institutional framework is designed to balance policy and operational independence with accountability for policy and financial performance. financial accountability and other expectations ( e. g. reporting to parliament ) were strengthened in 1989 when the rbnz was given greater policy independence. a 2 percentage point rise in the us interest rate on excess reserves would eliminate the federal reserve ’ s profit and equity capital within a year. ( using bis term p7 ) bis central bankers ’ speeches the reserve bank of new zealand act 1989 established the central bank as a body corporate whose primary function is to formulate and implement monetary policy for the purposes of achieving and maintaining price stability. the rbnz ( which i will also refer to as “ the bank ” ) is also mandated to promote the soundness and efficiency of the financial system. the bank is owned by the crown and capital is provided by the government, to whom dividends are returned. the act grants the bank the right to deal in foreign exchange, issue currency, and act as lender of last resort if it deems it necessary3. these arrangements and powers underpin the bank ’ s financial strength and its risk exposure. income is assured through the authority to invest proceeds from the sale of currency and bank capital, and may be earned ( or lost ) through trading or investment in debt securities, money market instruments, derivatives, and foreign exchange. new zealand has a floating exchange rate, and prescribed limits on foreign reserve holdings contain the crown ’ s risk exposure. by law, the minister of finance sets limits ( a range ) on the foreign reserve holdings of the bank, and the bank then manages them to achieve policy, liquidity and risk - return objectives. a memorandum of understanding with the minister provides further guidance to the

to the rescue. of course this has significant imbalances for the new zealand outlook. demand from western countries is gradually improving, but still not very encouraging. the sad us housing story is bad for our wood exports, the uk fiscal retrenchment is hurting our uk tourist numbers and the fragile japanese recovery restrains our food exports. our own internal rebalancing is progressing, but very slowly. substantial fiscal stimulus helped cushion the economy over the past few years. the fiscal deficit will need to be closed and private demand take over public sector support. moreover, it appears that some of the fiscal deficit is structural and unwinding this support will subtract from growth for a number of years, with our housing market remaining weak, consumption impaired, balance sheets fragile and businesses remaining cautious. private demand is still impaired. what is yet to come however at the same time the strong growth in east asia and australia emerging markets has been very beneficial. these markets were much less affected by the financial crisis, have themselves enjoyed strong export prices, and are now being buoyed by growing domestic demand. russia, brazil, energy exporters, south africa and the southern american countries are also in this group. they are developing a much stronger geopolitical voice for the g - 20. the chinese and india stories exemplify this – not by any means a simple picture, but here are two economies with continued strong export demand, government building of infrastructure, and evolving domestic demand. these economies have strong connections to regional growth that will benefit new zealand indirectly over and above our direct trade exposure. other medium term implications look particularly interesting for new zealand. post - war evidence shows that as emerging markets develop significant middle classes, there is a commensurate increase in demand for protein, increasingly animal - based. that has been the pattern across a number of countries with different cultures in different geographies. many of these countries are limited in expanding their own food production, by lack of suitable land, lack of water, increasing climatic volatility, and high oil prices. a recent nomura report 2 argues that real food prices will need to rise significantly. new zealand is not a huge food producer ( not being among the top half dozen producers of any of the world ’ s key food product groups ). however our food exports ( as a % of gdp ) top the world, and we are the best placed in competitive terms in nomura ’ s food vulnerability index. food trade is volatile in