pencer, 1990)(Spencer & Carey, 1988)(Peare, 1999). In 1986 the reforms, by the Labour party, of the New Zealand banking system began with expansion of the financial system to incorporate new domestic and foreign banks, with no limits placed of the number of new banks allowed. As well as leading to a more competitive banking system, it also lead to an increase in the powers of supervision allocated to the Reserve Bank, and a decrease in its ability to interfere with the financial system. The Reserve Bank of New Zealand Act 1989 was implemented in 1990 to direct the Reserve Bank to maintain inflation to an acceptable level determined by the both the Minister of Finance and the Governor of the Reserve Bank. The inflation targets were designed to achieve price stability in the marketplace. Other functions required of the Reserve Bank were also stated in the 1989 Act. These included currency issuing, New Zealand foreign reserve management, strict adherence to exchange rate policy, to be a last resort lender and a settlement bank to the financial system, provide banking services for the government, policy advice for the financial sector, providing advice on exchange rate policy, and commercial registry operation. Since the 1989 Act, sustainable growth has been added as a requirement of the Reserve Bank. This sustainable growth had to be achieved in conjunction with the existing monetary policy, plus the requirement for price stability. Sustainable growth was introduced by the 1996 coalition government and included expanding the inflation target rate to 0-3%. In February 1999 the Reserve Bank was given responsibility of setting the wholesale interest rates. This allowed the Reserve Bank to set overnight interest rate targets, otherwise known as the Official Cash Rate. The allowance of the Reserve Bank being able to set interest rates allows for the bank to have substantial sway over the short-term interest rates, and subsequently, the monetary...
