Export prices deliver benefits to economy
Speaking to a farming group, the Grasshoppers, in Ashburton last night, Dr Bollard said the Bank expects the higher terms of trade to continue to be reflected in the exchange rate, as it is currently. The exchange rate would deliver the benefits of the rising terms of trade to the community at large – through higher wealth and cheaper imports.
Global commodity prices have experienced the largest boom in more than 100 years, Dr Bollard said. While hard commodities have seen the biggest surge, agricultural commodity markets have also seen a fundamental change. Another surge in prices has since seen food prices surpass the 2008 record level, boosted by supply disruptions, particularly in grain markets.
Analysis by the Bank indicates New Zealand's agricultural export prices are likely to remain elevated for some time. Although in the near-term, prices could fall slightly as supply becomes less weather-disrupted, demand is underpinned by urban and wealth growth in developing countries, especially China.
Given this outlook, monetary policy will remain focused on any medium-term inflationary pressures that arise, rather than the terms of trade shift in itself.
"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."
Dr Bollard noted, however: "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."
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