china given the very rapid build - up in corporate ( mainly soe ) debt since 2008, and the rising level of bad debts in the shadow banking 6 / 11 bis central bankers'speeches sector. uncertainty also exists around the pace at which the comprehensive economic reforms identified in the 3rd plenum will be implemented. sources of uncertainty elsewhere include the middle east, russia, north korea, and brazil, but unless developments in these countries trigger commodity or security - related risks, such events are less likely to have major global economic and financial impacts. to what extent could developments in the us, europe and china affect new zealand ’ s economy? many of the risks in these regions are well known, and already reflected in relative prices such as interest rates, exchange rates and commodity prices. it is new information, either through additional data or greater clarity about policy intent, that leads to reassessments of judgements around economic impacts and transmission effects. a ) brexit the financial market turbulence immediately following the brexit vote appears to have largely settled down, and the uk economy has performed better than expected since this vote. clearly, however, much uncertainty lies ahead as the actual brexit negotiations get underway and as we wait to observe the overall tone, shape and outcomes of these discussions. although the eu and uk are important trading partners of each other, and have much to gain through trade, there is always a risk that political considerations predominate and lead to more restrictive longer - term trading arrangements. the combined eu and uk economies absorb around 14 percent of our goods exports and 23 percent of our service exports. if negotiations appear to head to an impasse or unfavourable outcomes, financial market pressures could spread into global markets and affect our external funding costs, equity markets and exchange rate. greater uncertainty, along with higher funding costs, could reduce investment intentions with longer - run implications for domestic output and productivity. b ) slowdown in china a significant slowdown in economic growth in china would directly impact new zealand ( through trade volumes, investment, commodity prices, tourism etc. ) and indirectly through reduced growth prospects in our regional trading partners – china, australia and the rest of asia account for around three quarters of our trade. china accounts for around 15 percent of world output ( at current market exchange rates ) and is new zealand ’ s largest trading partner for exports and imports of goods. imf estimates suggest that an investment - driven, one percentage point drop in china ’ s output growth would

graeme wheeler : some thoughts on the balance of risks around the reserve bank ’ s monetary policy setting speech by mr graeme wheeler, governor of the reserve bank of new zealand, to craigs investment partners ’ investor day, auckland, 2 march 2017. * * * introduction thank you for inviting me to join you today. it ’ s a pleasure to exchange views on the challenges facing the reserve bank ( bank ) and investors in interpreting policy signals and political and market developments. in particular, i will focus on what we consider to be the main risks around the interest rate projections in the february 2017 monetary policy statement ( mps ). new zealand is one of the few countries where the central bank publishes interest rate projections in its mps. these projections represent the bank ’ s central view of the policy path needed to return inflation to the 2 percent mid - point of the target range specified in the policy targets agreement ( pta ). such projections are highly conditional and based on a range of assumptions – many of which lie beyond the bank ’ s control. such factors include : the outlook for global growth, inflation and commodity prices ; movements in exchange rates and long term interest rates ; the scale of migration flows ; and the government ’ s spending and tax policies. these key assumptions, and other factors that affect the economy ’ s output gap ( or the extent to which there are capacity constraints, and therefore inflation pressures in the economy ) are extensively debated in - house prior to finalising the mps. the ocr track contained in the february 2017 mps the official cash rate ( ocr ) projections in the november 2016 mps contained a slight easing bias, building in a 20 percent probability of a further 25 basis - point interest rate cut. this easing bias was replaced with a neutral bias in the february 2017 mps, which shows an unchanged ocr until mid - 2019. this suggests that if the economy were to develop along the lines of the bank ’ s economic projections, the current ocr would be sufficient to return annual consumer price inflation to around 2 percent. ( the track incorporated a 25 basis point increase in the ocr in late 2019. as the economy would then be entering its 11th year of expansion, the usual maturation processes in a business cycle suggest it would be reasonable to expect an eventual rise in the policy rate as capacity pressures become more broad based. ) 1 / 11 bis central bankers'speeches the risks around future ocr movements are considered to be equally weighted. in effect, there is an equal probability that the