(Bloomberg) -- New Zealand’s financial market will progressively have less settlement cash available over the next year, Reserve Bank Assistant Governor Karen Silk said.
The transition from a position of “abundant” settlement cash to “ample” is already under way as a number of balance sheet tools deployed to support the market during the Covid pandemic wind down, Silk said in a speech Tuesday in Sydney.
“While noting the uncertainty, our internal projections suggest it is possible we may reach an ample settlement cash level in the second half of 2025,” she said. “Participants in the cash market should prepare for an end of the abundant liquidity environment we have become used to in recent years, and likewise we are preparing to support a smooth transition to an ample settlement cash level.”
Tighter levels of cash mean wholesale interest rates may be more sensitive to events that change settlement balances such as bond maturities and government transactions, both spending and tax. Market participants — including the RBNZ — will need to be more active in their management of liquidity as a result.
“What constitutes an ample level is uncertain and may change over time,” Silk said. “There is also no historical precedent for the level of decline in settlement cash that is under way. Current internal estimates of ample carry a wide range, reflecting the inherent uncertainty surrounding the many factors that can influence the demand for settlement cash.”
As a consequence, the RBNZ doesn’t intend to publish a point estimate of ample but will monitor indicators and market intelligence to maintain it at the appropriate level, she said.
Other policy factors potentially impacting the demand for settlement cash, and its distribution throughout the system, will include the implementation of a Committed Liquidity Facility as part of the RBNZ’s updated liquidity standard, the outcome of the review of who can access the Exchange Settlement Account System and longer-term developments like digital cash, she said.
Silk said the RBNZ will adopt a hybrid approach to liquidity provision using daily operations or standing facilities that provide liquidity on demand, combined with foreign exchange swaps to supply liquidity. The RBNZ does not currently see a need to use additional asset purchases as part of its supply driven tool kit, she added.
“We believe that the most pragmatic and flexible way to provide liquidity in New Zealand is to use a hybrid approach, combining supply- and demand-driven elements,” she said. “This should require only a modest adjustment to our current framework.”
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