1997? in october that year, the world economic outlook published by the imf projected that world economic growth would continue at above 4 per cent per annum for the balance of the decade. this projection was made in the knowledge of the emerging problems in asia, but in the expectation that relatively robust growth would continue in the united states and europe. a few weeks later, the south korean economy was clearly in serious difficulty, but the mean of the november consensus forecasts projected that industrial production in korea would grow by almost 8 per cent in 1998. industrial production in japan was projected to grow at what seemed like a very modest 2 per cent this year. we were suspicious that perhaps the consensus forecasts were not picking up the seriousness of the deterioration in the world situation. for the first time, we deliberately departed from our traditional use of the mean of the consensus forecasts, and instead used a pessimistic sub - set of those forecasts. we had a hunch that the situation could turn out even worse than these numbers suggested but, with the overwhelming majority of international forecasters continuing to project strong growth in key markets such as australia, the united states, and europe, we stayed with that pessimistic sub - set. even though, with the wisdom of hindsight, it is clear that the growth we projected for the new zealand economy in 1998 was too optimistic, that is not the same as saying that monetary policy itself was flawed. every quarter, the bank produces a new quarterly projection, and adjusts its position in the light of new data. perhaps of even greater importance, the bank allows financial markets very considerable leeway to adjust monetary conditions in the light of new data between those quarterly projections. the real issue is not whether the bank ’ s projections were absolutely correct ; they will never be. rather the issue is whether the bank allowed monetary conditions to evolve appropriately in the light of new information, and i believe that we did. over the 10 months since december 1997, the easing of monetary conditions has accelerated so that today monetary conditions are the equivalent of almost 10 percentage points easier than they were in december 1997, and more than 9 percentage points easier than they were projected to be now, back in december 1997. of course, not all of that easing has been through reduced interest rates : the exchange rate has fallen substantially also. but 90 - day interest rates today are at levels last seen in early 1994, and indeed, apart from that brief period in early 1994, new zealand has

average trade - weighted exchange rate is a little higher than the present level. but just as the exchange rate almost certainly overshot during the period of almost four years in which it was appreciating, so it may overshoot ‘ on the other side ’. given new zealand ’ s large current account deficit, and still - heavy dependence on world commodity markets, some further weakness in the currency in the short - term would not be at all surprising. one thing we know with confidence, and that is that if financial markets feel disinclined to continue investing in new zealand in large amounts at current low interest rates, either interest rates will rise somewhat or the exchange rate will fall somewhat. the reserve bank ’ s responsibility is to ensure that, whatever the mix of monetary conditions, we continue to deliver price stability. conclusion on 26 june this year, i gave a speech entitled, monetary policy in a dangerous world. though delivered about two hours after the release of the weak march quarter gdp numbers, it was, of course, written several days before that release. in it, i warned that we could well be facing ‘ the most serious shock to hit the new zealand economy since the oil shocks of the 1970s ’. but i also said that the reforms of the last 15 years, including a monetary policy committed to delivering on - going price stability, put us in a good position to weather the storm. nothing that has happened since 26 june has changed my mind, either about the seriousness of the shock or about our ability to weather the storm.