Impact of quakes priority for Reserve Bank

4:52 pm on 30 June 2011

The impact of rebuilding earthquake-damaged Canterbury on monetary policy is the Reserve Bank's main task over the next year.

In its annual statement of intent, which sets out its priorities over the next few years, the central bank says the effects of the Canterbury earthquakes are complex and significant.

Reserve Bank governor Alan Bollard says the quakes have significantly reduced near term economic activity but the rebuilding will stoke the economy, reduce spare production, and inflame inflation pressures.

Along with rising commodity prices and a higher New Zealand dollar, Dr Bollard says setting interest rate levels to contain inflation within the 1% to 3% target band will be challenging.

The earthquake has also stressed one of the country's significant insurers, AMI, and the Reserve Bank says it will closely monitor the sector as it sets up the new regulatory framework and licencing system.

The bank is also concerned with putting in place banking rules that can mitigate credit booms and increase the stability of the financial system, as well as a plan to implement new international capital and liquidity reforms.