Reserve Bank bills

Press, 12 July 1988, Page 26

Reserve Bank bills

NZPA Wellington Relief from volatile interest rates is widely expected in New Zealand as a result of the introduction of a new government security to be known as Reserve Bank bills. The new bills, expected to be offered for sale by the Reserve Bank from September, will take over the monetary control function of Treasury bills.

Treasury bills will still be offered, but purely as a shortterm means of funding the Government’s debt.

Up till now, Treasury bills have served both functions, with sometimes disastrous results for interest rates.

The Reserve Bank now offers Treasury bills to draw cash out of the banking system and/or place cash at some future date where it may be needed.

It can do this to manage debt, or to manage monetary conditions.

Debt management requires the . Treasury, through the Reserve Bank, to raise cash through the issue of new securities to buy back maturing securities (Treasury bills and government bonds). The

Treasury also requires sufficient cash to be left in the banking system to cover four tax-takes through the year.

But the Reserve Bank is also responsible for managing monetary conditions in line with the Government’s inflation targets. This role requires that in months with high cash surpluses, for example during the height of the export season, excess cash must be drawn out of banks to prevent it leading to unwanted borrowing and spending booms which could spell disaster for anti-inflationary policies. The converse will also apply: in months when cash can be expected to be scarce, as was the case when the SOEs were paying the Government for their assets, cash must be pumped into the banking, system to avoid u n e c -

essary sharp rises in interest rates.

Monetary conditions — rather than purely commercial debt management considerations — currently determine the timing and maturity of new issues of Treasury

This will all be changed by the new Reserve Bank bill. As the discountable bill— it can be sold back to the Reserve Bank for cash before maturity — it will be used purely as the instrument to control monetary conditions. Treasury bills will be nondiscountable, and so will not affect the Reserve Bank’s liquidity operations. They can therefore be set to mature whenever Treasury thinks is appropriate without the risk that they mess up the Reserve Bank’s monetary management. According to money market sources, the result should be smoother money flows, and less volatility in interest rates.

The move is also part of a reform of the Treasury’s debt management operation, freeing up the Treasury to issue a wider range of securities without impacting on the Reserve Bank’s role in controlling money supply. For investors, the Government will still be fulfilling its responsibility of providing a government security which large investors need for prudential reasons.