placed upon central banks at a time when the economic, financial and political interlinkages in the global economy seem more complex, and where monetary policy has become the fall - back policy to promote a strong global recovery. globally, the corporate and household deleveraging process has been more difficult and prolonged than expected – especially in the euro area. in many economies, deleveraging ( or simply reluctance to extend already high debt levels ) has been reflected in slow growth in household demand, weaker - than - forecast business investment, and persistent levels of excess capacity. our economy has generated better growth and employment outcomes than many other advanced economies in the post - gfc period. there are several reasons for this. our banking sector was far less adversely affected by the gfc than those in the united states and europe, canterbury reconstruction generated strong investment and boosted manufacturing production, and, only 18 months ago, new zealand ’ s terms of trade were at a 40 - year high. like other forecasters, we have been surprised by the strength of net immigration and its positive impact on productive capacity. there have also been question marks over the robustness of past empirical relationships, and the effectiveness of traditional monetary policy instruments, in an environment of unprecedented monetary accommodation in the global economy. central bankers have learned how hard it is to increase inflation expectations when inflation expectations are embedded at low levels and household debt levels are high. they have seen the short - term relationship between inflation and aggregate demand become more uncertain, and their ability to influence long - term interest rates, which has always been limited, has weakened. in addition, in a world of extraordinary global liquidity and asset price inflation, it is more difficult to assess the size of output gaps and the level of the neutral interest rate. one aspect that appears not to have changed much is that monetary policy affects inflation and inflation expectations with a variable and potentially long lag. monetary policy can take around 12 – 18 months to have its peak effect on inflation. policy outlook 1. recent policy developments in june 2014, the bank started to scale back the extent of its expected ocr increases ( figure 4 ), and by early february 2015 our expectation was that the ocr was likely to be on bis central bankers ’ speeches hold for some time. also, by this time the bank was discussing circumstances where the ocr might be reduced. 6 figure 4 : the bank ’ s 90 - day interest rate projections source : rbnz estimates. this perspective was reinforced as dairy prices began

6 ). figure 6 : inflation expectations ( annual, years ahead ) source : anz bank, aon consulting, consensus economics, rbnz the future path of the ocr will be driven by the flow of incoming data, our assessment of the economic outlook, and judgements as to what level of interest rates is needed to achieve the bank ’ s price stability goal. several factors will continue to be important in this regard including : whether wage and price - setting outcomes are consistent with the price stability objective ; whether the range of inflation expectations data suggests expectations have stabilised at an appropriate level ; future movements in commodity prices – especially global dairy prices ; and the degree of exchange rate adjustment that occurs and how quickly it passes through into inflation. some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession. we will review our growth forecasts in the september mpsbut, at this point, we believe that while demand and output growth may be a little below trend, several factors are supporting economic growth. these include the easing in monetary conditions, continued high levels of migration the growth rate of potential output is considered to be around 2. 6 percent. bis central bankers ’ speeches and labour force participation, ongoing growth in construction and continued strength in the services sector. a relevant issue is how rapidly the bank should seek to return inflation to the mid - point of the target band. there are important trade - offs here that can come at the expense of unnecessary volatility in output, interest rates, and the exchange rate – outcomes that, under the pta, the bank is required to seek to avoid. attempting to return inflation to the midpoint quickly could create the risk of overshooting the inflation goal, un - anchoring inflation expectations, and increasing the volatility of interest rates and the exchange rate, as monetary policy is significantly eased and subsequently tightened. on the other hand, while moving interest rates only gradually might have the benefit of inducing less volatility in output and key relative prices, it would increase the risk that the bank consistently undershoots its inflation target, and that inflation expectations get anchored at too low a level. our judgement in the current circumstances is that aiming to return inflation to around its medium - term target level in about nine to 12 months ’ time is an appropriate speed of adjustment. this may not always be the appropriate speed of adjustment. nor does it mean that the bank will necessarily deliver a precise outcome