Wellington, Oct 9 NZPA - The Reserve Bank's (RBNZ) annual net profit rose about 70 percent to $906 million from $535m a year earlier, while its dividend to the Government almost quadrupled to $630m from $168m.

In its annual report for the year to the end of June, published today, the RBNZ said its net profit was boosted by net foreign exchange gains of $370m, up from $225m the previous year.

Also gains of $187m were made on financial assets because of lower market interest rates, compared to a loss of $7m in the 2008 financial year.

RBNZ Governor Alan Bollard said the strong financial result reflected abnormally large changes in market conditions.

He warned that the RBNZ's future financial performance could be expected to be more volatile than it had been in recent years.

The annual report said overall returns from foreign reserves had been relatively strong in the latest year.

That was largely because the weaker New Zealand dollar increased the NZ dollar value of the RBNZ's foreign currency investments, while the value of the NZ dollar liabilities funding those assets remained unchanged.

The RBNZ needed to be able to intervene in foreign exchange markets, the annual report said.

An open foreign exchange position allowed the RBNZ to sell foreign currency outright without having to later purchase or borrow foreign currency.

It also meant the RBNZ's foreign assets and liabilities were not exactly matched, or hedged. Changes in foreign currency exchange rates may therefore result in losses or gains.

The annual report also noted New Zealand had escaped major damage in the worst global financial crisis in decades, but imbalances and vulnerabilities were highlighted.

"Prior to the crisis, households had been consuming beyond their incomes, borrowing heavily offshore through their banks," Dr Bollard said.

"In the past two years there has been a substantial correction in household savings and the external payments imbalance. However, further improvements will be needed to stop our international debt position from mounting further."

The recent rise by the New Zealand dollar had not supported the shift towards the export and import-competing industries that would be necessary to improve the situation, Dr Bollard said.

"On these trends, there is a real risk that recent improvements in the external balance will be reversed."

The report noted the RBNZ had been able to integrate its policy tools across monetary policy, financial stability and prudential supervision in response to the financial crisis.

Among the range of policy measures implemented was "the fastest and furthest fall in the OCR (official cash rate) on record", Dr Bollard said.

Steps were also taken to ensure banks could obtain funding by allowing them to borrow from the RBNZ, using a broader range of facilities and collateral.

International regulators were now likely to require better tools to regulate financial systems over the economic cycle, including stronger liquidity and capital adequacy standards.

The RBNZ would assess those developments in the New Zealand context as they emerged, Dr Bollard said.

In the meantime, the RBNZ had introduced a new prudential liquidity policy for banks which aimed to address the main vulnerability of the New Zealand system that was exposed during the crisis.

Progress was also well under way to implement a new prudential regime for non-bank deposit takers, in the wake of considerable weakness in the non-bank sector over recent years.

The RBNZ's crisis liquidity measures and earlier foreign exchange intervention carried risks to its balance sheet that continued to require careful management.

Its total assets expanded over the year to the end of June by about $6 billion, to reach $31b. The RBNZ's equity at June 30 was $3b.

In recognition of the seriousness of the financial crisis Dr Bollard, deputy governor Grant Spencer, and assistant governors Don Abel and John McDermott requested they be given no remuneration increase in calendar year 2009.