Managing New Zealand's foreign reserves

New Zealand holds foreign exchange reserves primarily to enable the Reserve Bank to intervene in the New Zealand currency market if serious liquidity problems were to develop. Holding reserves involves balancing a number of factors. We need to have assets that we can readily convert into cash in a crisis. But holding reserves costs money. We want to minimise that cost wherever possible, but we want to do so without exposing the Bank to undue financial risks. Much of this article is about how we balance these considerations and about the framework used to manage the risks associated with our foreign reserves operation. It also discusses our active management approach, undertaken with the objectives of reducing the risk-adjusted cost of holding reserves and enhancing our understanding of financial markets, and the relevant statutory provisions governing foreign exchange intervention and reserves.