, rbnz estimates. a weak world economy has been a key factor underpinning the new zealand dollar, with new zealand ’ s performance relative to other advanced economies supporting demand for new zealand dollar assets. the new zealand dollar exchange rate has been higher than the bank had assumed for much of the period ( figure 5 ). the new zealand dollar has remained elevated despite periods of increased risk aversion and steep declines in new zealand ’ s export prices. the strength of the new zealand dollar has dampened the prices of new zealand ’ s imports, and contributed significantly to the current low inflation, particularly in the tradables sector. figure 5 : nominal new zealand dollar trade weighted index and the evolution of rbnz estimates ( actual shown in bold ) index source : rbnz estimates. the prices of the goods and services that new zealand imports have also been lower than expected – even once the effects of high exchange rate have been taken into account. again, a weak global economy has been the contributing factor, with significant spare capacity across the globe dampening the world prices for new zealand ’ s imports. in addition to this impulse, there was a sharp decline in the price of oil over 2014 and 2015, reflecting a combination of increased global supply and a moderation in growth in emerging economies. this drop in oil prices has contributed further to low inflation in new zealand. it is possible that structural changes may have also contributed to negative tradables inflation in new zealand. this could include developments such as a change in exchange rate pass - through, or a permanent shift in distributor or retailer margins. however, bank research suggests that such structural developments do not appear to account for weakness in internationally - driven inflation in new zealand. that is, although movements in the drivers of low tradables inflation – the exchange rate, oil prices and global prices for our imports – have led to negative tradables inflation, it does not appear that there has been a material or permanent change in the ways that these drivers transmit through to domestic inflation. 1 domestic inflation in recent years has been dampened by some sector - specific factors. communications prices have been falling since 2011 ( figure 6 ). the lower measured prices reflect an increase in quality : an increase in the size of broadband packages offered ( at similar monthly charges ) ; increased data and call minutes for mobile services ; and the more - recent introduction of ultra - fast broadband. the net reduction in vehicle relicensing fees ( reflecting a change in the way acc calculates

are increasing are by their nature usually situations where demand in the economy is running ahead of the economy ’ s long - term capacity to supply, so that monetary policy aimed at restraining those inflationary pressures inevitably tends to dampen down booms. and conversely, those situations where demand falls short of the economy ’ s long - term capacity to supply are usually situations where inflationary pressures are falling towards zero, so that monetary policy aimed at preventing inflation falling below zero ( as required by my agreement with the treasurer ) inevitably tends to work to mitigate those downturns. in determining the stance of monetary policy, we are inevitably trying to assess what future inflation pressures will be. that means we are always trying to assess how demand pressures will evolve relative to the economy ’ s ability to supply. are we primarily trying to smooth business cycles? no, we are trying to maintain consistently low inflation within the target we have agreed with government, but one of the corollaries, one of the ancillary benefits, is that, if we get it right, the business cycle will be somewhat moderated also - less vigorous booms and less recessionary busts. as one of america ’ s leading monetary policy economists, larry ball of johns hopkins university, has recently argued, even if you were mainly concerned to smooth output and employment cycles, focusing monetary policy on delivering predictably low inflation would be the most sensible way of running monetary policy. so let ’ s make this abundantly clear. the reserve bank has not had some sort of road - to - damascus experience. we have not decided that inflation matters less and that we have to ‘ go for growth ’. we have not decided to fix the current account. we have not decided to get the farmers back in the black. and we have certainly not, as columnist chris trotter put it, anticipated ‘ the national government ’ s political needs ’. the easing process that is now underway is absolutely intrinsic to, and an inevitable result of, the monetary policy framework that has applied in new zealand since the passage of the 1989 reserve bank act. more precisely, it is the inevitable result of an inflation target which has an upper and a lower limit. recent events are therefore just ‘ business as usual ’. recent changes in interest rates and the exchange rate but, you ask, hasn ’ t the reserve bank just deliberately knocked down the exchange rate and increased interest rates? doesn ’ t that suggest that the bank has taken its eye off the price stability ball,