Growing Confusion Regarding The Role Of Central Banks

Published: Mon 14 Nov 2022 10:41 AM
As political discussions continue around the New Zealand Reserve Bank governor Adrian Orr, there is a growing confusion regarding the critical role central banks play in business and commerce.
There is an erroneous and conditioned consensus among some politicians and their voting constituents, especially in the current political climate, that the central bank’s main function is managing interest rates.
Although one component of central banks, like the Fed or the New Zealand Reserve Bank, is focused on inflation and interest rate adjustments, it is not their primary function.
Over the past ten year research period, the central banks’ utility to global commerce and trade has been undermined by a superficial fixation on interest rates.
The primary and core function of central banks, including the Reserve Bank here in New Zealand, is to provide effective and efficient means for commerce transactions by and between financial institutions and their clients. Both the NZCLEAR and the NZ ESUS are critical systems designed expressly for the purpose and intention of offering electronic financial transactions to ensure secure and efficient trade.
Integral to the systems created by central banks, including ours, are real-time electronic gross settlement systems that allow substantially improved trade and commerce between countries. This real-time capacity to manage transactions is a business critical solution as it creates a highly robust mechanism for trade and commerce across national boundaries.
The ability for an island nation like New Zealand to have free-trade and bi-lateral agreements, open and effective commerce, and transactional support for foreign exchange remittances for individuals all require the function and utility of the New Zealand central bank, the Reserve Bank.
Furthermore, any negative sentiment that central banks serve limited purpose for society results from the fixation on news related to their role with interest rates, not their role with helping people perform critical financial transactions.
For instance, the Pacific Remittances Project (PRP) driven by the Reserve Bank, was enabled to ensure effective continuity of foreign exchange remittances for individuals in the Pacific Islands. Pointing out this critical need was Adrian Orr, the Governor of the Reserve Bank of New Zealand, in his release, “Keeping the bank door open for Pacific peoples.”
The Governor emphasised the need to work with Pacific banks to ensure continuity of banking services and remittances, even as smaller banks in the Pacific looked to de-risk away from such transactions.
The Governor noted in the same article, “Anti-money laundering laws are not an excuse to “de-bank” or “de-risk” from the Pacific Islands.”
This is an important point, as a number of banks have used the AML stipulations, critical to security of the banking system, to also reduce risks associated with providing services to lower income and lower profit regions and communities. Thereby potentially applying AML erroneously as a bias towards certain socio-economic communities.
The PRP is one example how Central Banks help provide policies and processes for banking to ensure remittances remain accessible, safe and cost effective for individuals in the Pacific Islands.
A foundational purpose of central banks is to ensure the continuity and efficiency of international financial transactions, central to effective trade and commerce.
This was also pointed out in a recent Scoop column National and ACT Aiming at the Wrong Target, by Peter Dunne. He along with a handful of people who better understand the role of our central bank, iterates, “the mounting focus on the Reserve Bank and the Governor is in fact aiming at the wrong target.”
Peter Dunne clarifies that, “He [the Governor] works within the provisions of the Policy Targets Agreement concluded with the Minister of Finance and the Reserve Bank Act. Therefore, the real target of criticism for the performance of the Bank and its Governor should be the Minister of Finance.”
Fixation on Adrian Orr, the Governor of the Reserve Bank, or on central banking role with interest rates misses the more substantive function to ensure stable economic systems.
Among the key roles are the promotion of safe and stable financial systems through policy and practice, thereby allowing both efficient business and consumer driven transactions in and external to New Zealand.
Although interest rate fluctuations will remain front and center for the news, and the Governor will continue to be a political focal point, most of the work performed by central banks remains largely behind the scenes. These functions ensure that New Zealand will continue to have productive and efficient trade and commerce over the coming decade.
Other recent articles on Scoop by Mark Rais include:
For Labour Ideology Must Better Match Reality
Housing And Rental Prices Are The Result Of Macroeconomics
Mark Rais is the creator of the think tank Trend Analysis Network, writer for the technology and science industry and volunteer senior editor for an on-line magazine. He has published several books and written numerous articles on the topics of macro-economics, technology and society.

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