the twin burdens of the high new zealand exchange rate and more aggressive pricing by foreign competitors as global trade volumes slowed. in order to facilitate recovery in the economy, while maintaining the reserve bank ’ s obligations for price stability, we lowered the official cash rate to 2. 5 percent, and helped to generate the lowest retail interest rates in 60 years. the forces behind new zealand ’ s economic recovery several factors beyond monetary accommodation contributed to new zealand ’ s economic recovery. these include : the recently improved economic climate in advanced countries ; high export prices for our major commodities ; the strength of construction investment, particularly in canterbury ; and the range of other factors driving the increase in private consumption. ( i ) the international economy the global economy is recovering after many years of fragility and uncertainty. output growth has increased in recent months in several advanced and emerging countries. world trade volumes are increasing and the global economy is now growing at about its average rate over the past three decades – albeit with exceptional monetary stimulus from central banks in the major economies. business conditions have improved in the united states especially, and in japan and in the united kingdom. the euro area has emerged from recession but the recovery is slow and uneven. china, the world ’ s second largest economy, is growing at around 7. 5 percent. ( ii ) the high terms of trade new zealand ’ s terms of trade are at their highest level since 1973 ( figure 1 ). bis central bankers ’ speeches our farmers, especially, are enjoying very favourable export commodity prices and an excellent season of grass growth. considerable focus is on the extremely high international dairy prices, but aside from aluminium, all of the sub - categories of the anz commodity price index are at or near record highs. strength in the new zealand dollar is distributing some of these gains to the broader spending public, but, even accounting for this, export prices in new zealand dollar terms are well ahead of those received in the 2008 commodity price boom. new zealand is benefiting considerably from its export linkages with the rapidly growing economies of east asia, especially china, and with australia. over the past decade china ’ s share of our exports has increased from 3 percent to 21 percent. china is now our largest export market for all our agricultural commodities except beef, where it is second only to the united states ( figure 2 ). ( iii ) the strength of construction investment over the past two years, construction investment has increased by 40 percent, largely due to the canterbury re - build.

against inflation. these benefits are eroded when inflation and inflation expectations become excessive. if actual inflation and expectations of future inflation were to rise significantly, competitiveness and real income growth would decline. the bank ’ s subsequent efforts to maintain price stability by raising nominal and real short term interest rates would be more disruptive, the further inflation was allowed to deviate from target. assessing the timing and magnitude of increases in the ocr involves difficult judgements because changes in interest rates tend to affect the rate of growth of output and inflation with a 12 to 18 month time lag, although it can be more rapid if the main transmission effects bis central bankers ’ speeches operate through the exchange rate. this means that interest rate judgements need to assess the degree of inflationary pressure in the economy throughout the forecast period and how inflation expectations and pricing behaviour might change in response to different levels of the ocr. these are judgements we face all the time. the complexity of them is increased in current circumstances by the fact that new zealand ’ s terms of trade are at a 40 - year high ; our exchange rate remains close to historic highs on a twi basis ; the economy is reallocating resources to meet construction needs in christchurch and auckland ; rising house price inflation is adding to consumer demand ; net migration is increasing rapidly ; and the united states is cutting back the scale of its quantitative easing. the reserve bank ’ s approach in assessing interest rate responses is driven by a combination of models, data, and judgement. we assess new economic information and whether it is different from the assumptions built into our published economic forecasts and interest rate projections. in the past six weeks for example, indicators on new zealand ’ s economic growth and inflation have been stronger than those built into our december projections, but the exchange rate has also been stronger and initial indications are that house price inflation may be starting to moderate, although it is too soon to draw firm conclusions. the exchange rate remains a considerable headwind for the economy, and the bank does not believe its current level is sustainable in the long run. we will undertake a comprehensive assessment of the outlook in the next monetary policy statement in march when further information will be available. the reserve bank ’ s projected path of interest rate rises contained in the december monetary policy statement suggests that the ocr will need to rise by around 2 percentage points over the next two years. yesterday we kept the ocr unchanged at 2. 5 percent, but signalled that inflation pressures are rising and that interest