some firms to obtain capital goods and access new technologies, and provided an incentive to improve productivity. through these channels the high exchange rate has helped to spread the benefits of elevated commodity prices. however, the high exchange rate continues to be a significant and unhelpful headwind for the non - agricultural traded goods sector by restricting export earnings and encouraging imports over domestic tradables production. it imposes high costs on firms that are forced to exit and re - enter markets due to large movements in competitiveness. its impact has been hardest on export firms that are not experiencing high international prices for their products, and on manufacturers and other businesses that compete with foreign imports. an unsustainable real exchange rate diminishes the tradable sector ’ s profitability and affects its investment and employment decisions. it can also result in a smaller than desirable tradables sector. international experience indicates that countries enjoying sustained rapid rates of economic growth have generally had significant growth contributions from competitive tradables sectors and strong international trade linkages. new zealand ’ s past experience with elevated exchange rates since the float of the new zealand dollar, new zealand has experienced four major exchange rate cycles, including the current cycle. each previous cycle has been notable for an unjustified and unsustainable real effective exchange rate followed by an initial depreciation and then a rapid correction ( table 1 ). on average, once the exchange rate has reached a peak, the peak - to - trough decline has occurred over 13 quarters. the average total decline has been 28 %, while the average decline over the first year has been 11 %. imf staff report for the 2014 article iv consultation on new zealand. petersen institute for international economics, policy brief 14 / 16. bis central bankers ’ speeches several factors led to the depreciation of the real exchange rate in the late eighties. the share market crash of 1987 initiated a period of deleveraging in the new zealand economy and this was compounded by the strong rise in oil prices in 1990 and a downturn in the global economy in 1991. the asian crisis was a key driver of the exchange rate depreciation from 1997. the downward pressure on the currency was exacerbated by a series of droughts from 1997 – 1999 and the financial shocks of the russian debt default and the collapse of longterm capital management. the new zealand dollar declined significantly from 2007, during the global financial crisis. the failure of lehman brothers, and the subsequent crisis in

centre of christchurch have lost some production, generally from the impact on their workforce. the canterbury employers chamber of commerce estimates around 30 percent of businesses in christchurch were materially impacted by the february quake. however, we may be seeing the first signs of a stabilisation phase, with business confidence surveys recovering strongly. bis central bankers ’ speeches the official cash rate cut in march, along with government support programmes, looks like it has been helpful in stabilising confidence, and we would expect the deterioration in activity to be arrested by mid - 2011. in canterbury, activity can be expected to lift due to resumption of business activity, replacement spending and government support. but the canterbury economy will remain subdued due to wealth losses, weakness in tourism and construction, and obstacles including damage to infrastructure and capital. nonetheless, recovery in the canterbury economy, combined with the boost from the rugby world cup, will result in a marked pick - up pace of overall gdp growth. the reconstruction phase is expected to begin in earnest in 2012, with residential and nonresidential investment lifting growth sharply. spare capacity and labour will be absorbed rapidly, and inflation pressures will pick up from current low levels, prompting interest rates increases. the likely drivers of inflation from a reconstruction such as we will see in christchurch are the demand and supply of labour, materials and equipment, and the availability of finance. how government policy affects regulatory standards and the rebuild is also clearly important. how will the reserve bank deal with this? we are guided by our policy targets agreement ( pta ) with government that says, in the case of natural disasters, we should accommodate any initial inflation effects, such as higher rents or insurance premiums. however, we should respond to any medium - term generalised inflationary pressures that are likely to develop, as resources are devoted to reconstruction in canterbury. this means assessing the extent to which wages, construction costs and other prices rise nationally, as resources are drawn into the canterbury region. at the same time, monetary policy should also look to avoid any unnecessary instability in activity, the exchange rate and interest rates resulting from the earthquakes. this consideration was behind the decision to reduce the ocr in march so as to mitigate the near - term negative impact of the february earthquake. it is appropriate for monetary policy to remain supportive, given the continued downside risks to economic activity stemming from the canterbury earthquakes and more broad fragility in the new zealand economy. it is likely that the ocr remains on hold until these