Reserve Bank is committed to ensuring smooth market functioning

New Zealand’s financial system remains sound, with strong capital and liquidity buffers.

Assistant Governor Christian Hawkesby said the Reserve Bank is actively involved in financial markets to ensure smooth market functioning despite the global uncertainty from COVID-19. Regular market operations continue to ensure there is ample liquidity in the financial system.

“The measures we are implementing today provide additional support to domestic financial markets. We will ensure our operations make financial markets operate smoothly,” Mr Hawkesby said.

“We are working in tandem with the banks, the wider financial market community, and the Government.”

The provision of term funding

The Term Auction Facility (TAF) is a program that will alleviate pressures in funding markets. The TAF gives banks the ability to access term funding, with collateralised loans available out to a term of 12 months.

Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets. The opening of the TAF will provide confidence that the Reserve Bank stands ready to support the market if needed. Further operation details on the TAF are available in a Domestic Markets media release.

Providing funding in FX swap markets

The Reserve Bank is providing liquidity in the FX swap market, to ensure this form of funding can be accessed at rates near the Official Cash Rate (OCR). This activity will increase in the weeks ahead to support funding markets.

Re-establishment of a USD swap line

The Reserve Bank has re-established a temporary USD swap line with the US Federal Reserve. This will support the provision of USD liquidity to the New Zealand market, in an amount up to USD 30 billion. This is a facility that is being offered to many other central banks globally.

Supporting liquidity in the New Zealand government bond market

The Reserve Bank has been providing liquidity to the New Zealand government bond market to support market functioning.

Ensuring a robust monetary policy implementation framework

To support the implementation of monetary policy, the Reserve Bank is removing the allocated credit tiers for Exchange Settlement Account System (ESAS) account holders. This change means that all ESAS credit balances will now be remunerated at the OCR. Under the previous framework, banks were charged a penalty rate on deposits of cash balances above their allocated credit tiers.

The removal of credit tiers for ESAS account holders will provide additional flexibility for the Reserve Bank in its market operations, by keeping short-term interest rates anchored near the OCR regardless of the level of settlement cash in the system. This framework for monetary policy implementation (i.e. a floor system) is common among other central banks overseas.

The Reserve Bank will continue to monitor the use of our liquidity facilities and ESAS settlement accounts. We anticipate that liquidity will continue to be distributed efficiently throughout the banking system. If not, we will review our framework for monetary policy implementation as needed.

A commitment to market functioning

The Reserve Bank has a number of tools to provide additional liquidity and the ability to increase the size of operations where needed. We are committed to using these to support smooth market functioning.

In addition to the tools listed above, the Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.

Mr Hawkesby reiterated that the Reserve Bank continues to monitor developments, and remains ready to act further to ensure markets and the financial system operate in a stable and efficient manner.

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