. the increase in interest rates is also helpful, given the continuing pressures we have seen in the domestic or non - tradeables sector of the economy, and especially in real estate markets. there is no benefit to new zealand in seeing real estate prices increase to a point where they become vulnerable to a sudden, and damaging, correction. ( anyone who has been observing events in south - east asia over the past couple of months will be conscious of the enormous damage that can be inflicted in those circumstances. our own experience post - 1987 is also instructive in that regard. ) the shift in the mix of conditions, while substantial, has occurred in a manner which is fully consistent with our inflation target, and fully consistent with our use of an mci in assessing the overall stance of monetary policy. it is certainly the case that the sharp decline of the exchange rate will boost inflation to some degree in the short term. that is already apparent in our projections. but even with that increase, projected inflation remains well within our target range. and the increase in interest rates that has accompanied the exchange rate fall will work in the opposite direction, dampening inflation in the longer - term. the mci at the time when the exchange rate was declining, and interest rates were rising, we heard a good deal of criticism of our mci. it was, it was claimed, too rigid ; it was forcing up interest rates at a time when the economy was already in recession ; it was based on a relationship between interest rates and the exchange rate which was no longer valid ; and so on. as i made clear in my speech to the counties kiwifruit growers association on 22 august, i regard those criticisms as ill - founded. i think the mci structure has performed admirably over the past three months. in making that assessment, i think it is important to reflect on just how volatile international exchange rates have been over that period. any of the alternative monetary policy arrangements we could have adopted in place of the mci would also have been subject to a good deal of stress. i certainly see no reason to change the mci approach at this point. likewise, the description i offered in june of how the bank might react to deviations in actual market conditions from the central or ‘ desired ’ mci track appears to us to have weathered the tests of the past quarter rather well. i see no reason to modify that description now, and our response to evolving market conditions over the next three

the economy can evolve to essentially the same point. what is portrayed in this document is just one of those paths, but one that we feel is both realistic and sound as a base for our policy judgements. the real economy shortly after our june monetary policy statement was published, the release of march quarter gdp data seemed to suggest that the economy was significantly weaker than we had allowed for. our subsequent analysis indicated that there were particular factors ( notably that easter, unusually, fell into the march quarter ) which explained much of the small decline in gdp in that quarter. since then, the emerging data have suggested that the economy is a little weaker than we had portrayed in june, but that it is also resuming a robust growth path. whereas we were projecting an annualised growth rate through the first half of calendar 1997 of a little over 1 percent, the estimate incorporated in these projections is closer to 0. 5 percent. having said that, data released since we completed the projections are, if anything, suggestive of stronger rather than weaker outcomes for june quarter gdp. in any event, we remain of the view expressed in june that activity will pick up in the second half of the year. over the year to march 1998, we expect the economy to expand by around 2. 5 percent, accelerating further to 4. 6 percent growth in the year to march 1999. the factors driving that expansion include a robust global economy, gradually increasing household expenditures, improved productivity, stronger exports ( partly the result of a lower exchange rate ), business investment and an expansionary fiscal policy - - both from increased government spending under the coalition agreement and from the tax cuts scheduled for july 1998. easier monetary conditions since earlier this year are also supportive of stronger growth. it seems clear that, in the middle of this decade, the new zealand economy became somewhat over - stretched in terms of its ability to support the pace of spending. it seems equally clear that the economy has entered a period in which there is some spare capacity. given the current and imminent expansionary forces that i have described, the spare - capacity phase should be short - lived, but long enough to take the pressure off inflation, and long enough to make it unlikely that we will experience the kind of destructive crunch that has so often brought past cycles to a shuddering halt. in this sense, we are describing a growth profile that reflects the steadying influence of maintaining low inflation, which in turn should contribute to new zealand ’ s future growth potential. we expect continued job