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Budget 2006 Home Page Half Year Economic & Fiscal Update 2006

Key Trends

Settlement Cash Level

The Reserve Bank of New Zealand has raised the settlement cash level to approximately $7.5 billion at 31 October 2006 from $2 billion at 30 June 2006, as a result of its Liquidity Management Review. The change in the settlement cash level reflected the Reserve Bank’s concerns over liquidity pressures in the New Zealand banking system.

With commercial banks now holding significant quantities of settlement cash, their demand for Treasury Bills issued by the New Zealand Debt management Office (NZDMO) has reduced. The holdings of Treasury Bills are forecast to reduce by $2.2 billion by 2010/11.

What is settlement cash?

Settlement cash is the amount of cash the Reserve Bank leaves in the banking system each day. The Reserve Bank aims to leave a relatively constant level of cash in the banking system, although this can be subject to change from time to time. Settlement cash can be used by banks to meet their payment obligations. Hence, settlement cash is a liquidity mechanism used to settle wholesale obligations between the banks and provides the basis for settling most of the retail banking transactions that occur every working day between corporates and individuals.

What is the impact on the fiscal forecasts?

The settlement cash activity of the Reserve Bank is financed from commercial banks and not by Government funding, so doesn’t impact on the Government’s residual cash position. It does impact on GSID and the components of the operating balance (as outlined in the table below), however the impact on the overall net worth and operating balance is neutral.

The following table outlines the impact of the above transactions on the fiscal forecasts at 2010/11 relative to 30 June 2006

 Impact on GSID Impact on the Operating Balance
Increase in settlement cash+ $5.5 billion+ $0.7 billion (revenue)
+ $0.7 billion (expenses)
Reduction in Treasury Bills- $2.2 billion- $0.2 billion (revenue)
- $0.2 billion (expenses)
Total + $3.3 billion Nil
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