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Bollard points to benefits of strong NZ dollar

Tuesday 12th April 2011

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Reserve Bank Governor Alan Bollard has pointed to the wealth benefits of a strong dollar, but warned about the inflationary consequences of too quickly spending that wealth.

Agricultural export prices were likely to remain strong for some time, delivering benefits to the economy, Bollard told farming group the Grasshoppers in Ashburton last night.

The Reserve Bank expected the higher terms of trade to continue to be reflected in the exchange rate, he said.

The exchange rate would deliver the benefits of the rising terms of trade to the community - through higher wealth and cheaper imports, Bollard said.

Monetary policy would remain focused on medium-term inflationary pressures, he said.

"If households and firms use the income boost from higher commodity prices and exchange rates to bring forward consumption and investment, or increase borrowing, then pressure on resources in New Zealand would lead to more inflationary pressure. Monetary policy would need to counteract any rise in inflation expectations," Bollard said.

Global commodity prices had experienced the largest boom in more than a century, and while hard commodities had seen the biggest surge, agricultural commodity markets had also seen a fundamental change.

Food prices had passed record levels of 2008, boosted by supply disruptions, particularly in grain markets, Bollard said.

Reserve Bank analysis indicated agricultural export prices were likely to remain elevated for some time.

Although in the near term, prices could fall slightly as supply became less weather-disrupted, demand was underpinned by urban and wealth growth in developing countries, especially China.

"One thing we do know is that the projection will remain uncertain. History shows it is fiendishly difficult to predict the future path of commodity prices," Bollard said.



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