RBNZ decided to 'flood' the system with balances to make things more fluid. This involved conducting open market purchases that bloated the monetary base (comprised of currency plus deposits) from around NZ$6 billion in mid-2006 to just under NZ$14 billion by December of that year. See chart below.
(Note that the RBNZ's problems began far before the credit crisis and were due entirely to the peculiar structure of the clearing system, not New Zealand's economy.)
Koning describes the lack of inflation as a result of the perceived "permanence" of the increased reserves. I think it comes from the fact that reserves pay interest -- as they do in New Zealand. Either way, the point is that banks and people are happy to sit on interest-paying money, in enormous quantities, just as they are on bonds.
The corresponding inflation and interest rates:
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| Source: Reserve Bank of New Zealand http://www.rbnz.govt.nz/statistics/key_graphs/inflation/ |
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| Source: Reserve Bank of New Zealand http://www.rbnz.govt.nz/statistics/key_graphs/90-day_rate/ |
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