MONETARY POLICY “Monetary Policy is defined as the setting of interest rates, in order to control the quantity of credit and money supply, to influence the level of economic activity” There are 3 tools available under this policy: 1.Official Cash Rate 2.Open Market Operations 3.Jawboning NOT USED MUCH THESE DAYS

RESERVE BANK BNZ WESTPAC Fa’aoge’s Account Anna’s Account BNZ Cheque Pay Anna $ OCR 7% 7.25%6.75%

OFFICIAL CASH RATE HOW DOES IT WORK? The Official Cash Rate (OCR) is an interest rate set by the Reserve Bank to implement monetary policy, so as to maintain price stability. The OCR review is done 8 times in a year. By setting the OCR, the Reserve Bank is able to substantially influence short-term interest rates, such as the 90-day bill rate, floating mortgages etc. In turn, this influences the overall level of economic activity in the country and therefore inflation.

When an OCR is announced - it is a percentage number – 7.25% This means Reserve Bank undertakes to pay financial institutions an interest rate 0.25 per cent below the OCR for money deposited in Reserve Bank settlement accounts ie 7.00% The Reserve Bank also undertakes to Lend overnight cash to banks against good security, charging interest at 0.25 per cent above the OCR – ie 7.50%

The effect of this is that no commercial bank is likely to offer short-term loans at a rate significantly higher than the Official Cash Rate. Why? Because other banks would undercut that, using credit from the Reserve Bank. Similarly a bank is not likely to lend short- term at below the OCR because the same bank can lend to the Reserve Bank and receive interest at the OCR level. By controlling short-term interest rates in this way, the Reserve Bank can influence short-term demand in the economy, and by that put pressure upwards or downwards on average prices.

OPEN MARKET OPERATIONS Reserve Bank participates in the financial market on a daily basis. It does this to maintain the right amount of cash that is available to all the banks to settle each others debts. It does this by injecting money into the money market or by soaking it up. This is done through buying existing securities from the banks – (injecting) or selling securities to them – (soaking up).

JAWBONING The method used by the Governor of RBNZ by talking to the Business sector. This involves dropping hints about future OCR movements. It also involves sending messages to consumers about their spending and saving patterns. These statements may or may not be backed up with actions.