1. The impact of the crisis on Monetary policy Credit Suisse Asian Investment Conference Hong Kong 25 March 2010 Grant Spencer Reserve Bank of New Zealand

2. Impact of the Crisis on Monetary Policy Pre-crisis monetary policy Post-crisis monetary policy Role of prudential policy

3. The pre-crisis experience NZ monetary policy tighter than overseas Domestic impact reduced by inverse yield curve Pressure on exchange rate through carry trade

4. NZ borrowers took advantage of inverse yield curve

5. NZD pressured by carry trade

6. Foreign holdings of NZD securities grew rapidly pre-crisis

7. Impact of the Crisis on Monetary Policy Pre-crisis monetary policy Post-crisis monetary policy Role of prudential policy

8. Post-crisis expectation Price stability still the appropriate target Monetary policy to have more kick Likely to be reinforced by Prudential policy

9. “Flexible inflation targeting” passed the oil shock test in 2008

10. Monetary policy impact will be enhanced Higher bank cost of funds Reduced asset price expectations Positive yield curve

11. Bank funding costs up 120-130bp

12. Pushing up lending margins over OCR

13. Demand side factors have also reduced the “neutral” OCR level Lower house price inflation Reduced debt appetite Tax measures mooted on housing

14. NZ yield curve now positive (borrowers have nowhere to hide)

15. Impact of the Crisis on Monetary Policy Pre-crisis monetary policy Post-crisis monetary policy Role of prudential policy

16. Monetary policy to be reinforced by prudential New prudential liquidity policy a stabilising force RB exploring other macro-prudential options Caution warranted on macro-prudential

17. New prudential liquidity policy Liquid assetsStable funding One week mismatch ratio to be met by primary liquids One month mismatch ratio to be met by primary and secondary liquids Secondary liquids include bank paper up to specified limits Core funding ratio: at least 65%, moving up to 75% by mid 2012 Core funding = customer funding (weighted by deposit size) plus market funding > 1 year to maturity ( starts 1 April 2010)

18. Core funding ratio has been cyclical Core funding ratio (% of loans and advances)

19. A cautious approach to macro-prudential Few realistic options for active management Need to keep prime purpose clear: Financial system stability Potential to reinforce monetary policy on up- cycle (asymmetric) Potential efficiency costs if pursued too aggressively

20. End of presentation