implications of intensive nitrogen use. in a world where customers pay increasing attention to the environmental footprint of production, this is a serious issue. other impacts on nz activity there is some evidence to suggest that prices for agricultural commodities are becoming increasingly linked to prices for other commodities, particularly energy. figure 15 : oil prices and world prices for new zealand ’ s key export commodities strong growth in demand for biofuels suggests greater convergence between agriculture commodities and energy commodities in future. arbitrage from the oil market may support some agricultural commodity prices ( in new zealand ’ s case mostly dairy prices and, to a lesser extent, beef prices ) at structurally higher levels, as long as high oil prices are sustained. but, if we are going to see dairy prices remain at high levels, there are some other “ winners ” and “ losers ” to bear in mind. we know that higher world commodity prices are typically associated with a higher exchange rate. and, while the recent appreciation in the exchange rate has dampened returns to dairy farmers to a degree, it has, at the same time, effectively distributed some of these income gains to consumers via lower import prices. however, as the increase in commodity prices has mostly been in dairy, the higher exchange rate has reduced new zealand dollar returns for many other exporting industries, including some farm production. this phenomenon is known as “ dutch disease ” : very high prices for one export sector can crowd - out competitiveness in other export sectors. monetary policy implications it bears repeating that we cannot be sure about the path of dairy prices over the next few years following their recent run - up. assuming dairy prices do remain at elevated levels there are likely to be many benefits for new zealand, including higher growth and a reduced trade deficit. however, from a monetary policy perspective, a terms of trade shock of this magnitude poses some challenges. it is likely that higher dairy prices will affect inflation in a number of ways. firstly, as alluded to previously, increases in world dairy prices will lead to higher domestic dairy product prices. this has already begun to occur. milk and milk based products are part of the cpi, increases in domestic dairy prices are likely to have a fairly prompt ( though likely small ) impact on cpi measured inflation. secondly, and most importantly, higher dairy prices will provide a substantial boost to rural incomes. of course, for many this is very good news. however, we are dealing with a stretched economy at present. domestic demand is already strong. capacity is tight.

##ilient – which was plain wrong. i must say, i never shared the view that we were in a world where there was no risk. that being said, when the first diagnosis was made at a global level with china, india, brazil, russia around the table, as well as of course japan, the us and the europeans, we didn ’ t challenge the fact that a market economy was the best recipe for producing growth. bis central bankers ’ speeches in germany there ’ s a very strong belief in the market, which is why german conservatives opposed crisis measures taken by the ecb. we ’ ve had two resignations by germans – axel weber and jurgen stark – from the governing council. if you ’ re talking about further steps towards european integration, are you in danger of losing the germans? first of all, i don ’ t know what “ the germans ” means, i don ’ t know what “ the english ” means, i don ’ t know what “ the french ” means. we are living in cultures that are very deep, very profound and very complex, obviously, and where fortunately you have a lot of different opinions. we have a legitimate debate – in europe as well as in the us and in japan – about whether the central bank is doing well on this, well on that. the governing council of the ecb did all what was necessary to be faithful to its primary mandate and to take into account, in transmitting our decisions on interest rates, that we were in the worst crisis since 66 years, a crisis which was disrupting some markets. jurgen stark has been a very close friend for 18 years. he has worked for europe for the past 18 years. i have great esteem for jurgen and all that he has done and is doing. if you look back on all the years that you ’ ve been involved in european construction, is this the most serious crisis that you ’ ve had to deal with? i was involved in many crises : the real economy crisis after the first oil shock, the sovereign risk crises of the 1980s, the crisis of the exchange rate mechanism in 1992 and 1993, the asian crisis in particular. but what we are experiencing presently is bigger and has hit directly in at the heart of the advanced economies. so it is undoubtedly an historical event of the first magnitude, the worst financial crisis since the second world war. it could have produced a great depression had appropriate decisions not been taken at the appropriate. this is also the moment of maximum peril