##ewing their balance sheets further towards low - yielding housing assets. holdings of financial assets now look very low compared to what we see in other countries. " overall gearing was not substantially increased. households were apparently not worried about their greater indebtedness, about low rental returns, or about saving all their eggs in one basket. " by 2005 new zealand's normal short - term interest rates were looking high by oecd standards ( though not, despite some media confusion, the highest ). the difference in yields was attractive to some investors, and that is one of the factors that contributed to the persistently strong new zealand dollar. ( another key reason, we should not forget, was the strong terms of trade. ) " this was certainly a factor weighing on the reserve bank's mind over the last couple of years, and a reason why tightening took place gradually and moderately. ( as an aside, although some export industries came under significant pressure as the exchange rate rose, the sector as a whole appears to have managed the strong kiwi dollar better than in previous cycles. ) " the beginning of 2006 marked something of a turning point. the reserve bank finished its tightening cycle. new zealand's terms of trade started to soften. other oecd monetary policies started to catch up. and the trade weighted index fell by around 18 per cent between december 2005 and june 2006. at the same time the ` pipeline effects'of the official cash rate on fixed mortgages are continuing to come through. " this marks a rebalancing of economic growth from domestic sector - driven to export - driven. in this stage of the cycle our monetary policy has become a more effective brake on domestic spending. " even during the best of times, monetary policy affects activity and inflation with a significant lag. however, as we look back on 2004 / 05, we see a ` spongier'monetary policy than would be the case normally. applying the brake took longer to slow things down. this is similar to a two - year period in the mid - 90s, when our domestic / international interest rate differential was quite marked. " clearly, this could occur again at some stage in the future. it becomes more of a problem when new zealand's business cycle is significantly out of step with the oecd's, or when the latter have focused their monetary policy on a quite different issue. arguably, we have also had times at the opposite end of the cycle, when

it has been harder than we might have wished to stimulate consumption. " the reserve bank and the treasury now have a work programme focused on whether there are ways to reduce the likelihood of finding our economy out of sync again ; or on handling it differently if we do. " what is clear is that in a globalised world most of the government's economic policies, including fiscal, industry and immigration policies, are all constrained by other countries'policies and by international pressures on them. with financial markets so interconnected, any small country's domestic monetary policy also now needs to be seen in an international setting. " nevertheless, there is no question that we can run an independent monetary policy. we have control of our ship. if global winds are not behind us or our economy is out of sync with influential economies, then our progress becomes more difficult, and things can get uncomfortable. we may have to modify our chosen course. " but with major economies now raising their interest rates, global conditions are becoming aligned to containing inflation. in these conditions, new zealand monetary policy is increasingly effective. indeed in some respects we are in a more comfortable position than some other countries, having already raised interest rates. " in the meantime, we are starting to see some other countries, especially small open commodity economies, realising this too as they start to face the same pressures. they have been following the new zealand experience with interest. "