1998 is very much dependent on how the economy develops over the next few months. financial market participants eager to bring forward the small, and conditional, easings shown in these projections clearly do so at their own risk! on the face of it, with inflation over the next two years, and especially over the next two quarters, being a little higher than we thought likely back in june, easing now by more than we foreshadowed in june may seem surprising. the explanation is straightforward, and relates to the lags inherent in the operation of monetary policy. while inflation is a little higher in the short term than we had previously expected, it is still well within our target range, and has been boosted by factors which should be essentially transitory, such as the impact of moving housing nz rentals to market. of more relevance to the outlook in 18 months to two years ’ time is the margin of spare capacity in the economy. that now looks somewhat larger than it did previously, and warrants somewhat easier monetary conditions. although activity will be accelerating through 1998, it is not until 1999 that the inflation pressures associated with strong growth begin to emerge. a gradual tightening of monetary conditions from mid - 1998 fits with that profile. there are, of course, alternative paths for monetary policy that could deliver inflation within our target range. as was discussed in june, one alternative path would involve more aggressive easing now, followed by earlier and more aggressive tightening next year. another path would involve holding conditions relatively flat at about current levels until the latter part of 1998 before beginning a somewhat gentler tightening beyond that date. inevitably, there is rather more art than science in selecting the best of these alternatives. what we have chosen reflects the risks that we see around us at present, and also reflects the benefits we see in providing a relatively smooth path for monetary conditions over time. the mix of monetary conditions on numerous occasions over the past year or two, i have indicated that the particular mix of monetary conditions was unhelpful - - that the exchange rate was too high, putting excessive pressure on exporters, and that interest rates remained too low to discourage borrowing for housing purposes, or to encourage increased domestic savings. the past quarter has seen a substantial, and welcome, shift in the mix of monetary conditions in the direction we believed appropriate. the fall in the exchange rate will boost the incomes of exporters and those competing with imports, and will ultimately increase export volumes. the projected improvement in the current account balance reflects that

have actually left the city and in visible fight - backs such as the new container shopping mall and the business “ hub ”. with 80 percent of christchurch insured, capital could prove less of an issue than in other disaster - hit countries such as japan or china, with much lower insurance rates. a further boost will come from a large temporary reconstruction workforce that will require accommodation and services. the earthquake reconstruction in christchurch is very big in relation to the national economy. along with strong commodity prices it represents the major driver of growth over the next few years. how well christchurch manages that will reflect on all new zealand. gdp growth ( annual average ) source : statistics new zealand, rbnz conclusion 2011 saw two bad jolts hitting the new zealand economy. these have already had their initial impacts, showing up in lower actual growth numbers. but the new zealand financial system has so far stood up well, and the people of canterbury have comprehensively insured their structures sufficiently. these preparations have meant we are weathering the shocks well. both events have important economic implications and have created uncertainty, but we now have a clearer picture of the future. in the terms made famous by donald rumsfeld, we are moving from “ unknown unknowns ” to “ known unknowns ”. we cannot expect to have complete clarity for 2012. unexpected things will continue to happen and there will be more bis central bankers ’ speeches aftershocks, both financial and seismic ; the effects of both shocks could continue to rumble on for some time. the challenge for all of us, policy - makers and business people alike, in 2012 will be to deal with these “ known unknowns ”, to get on with economic activity, and to help christchurch and new zealand grow. bis central bankers ’ speeches