some “ what - ifs ”, identifying some economic developments that could make a sizable difference to our forecast picture. we examine a number of international and domestic scenarios that could conceivably impact us. these scenarios contain both “ good ” and “ bad ” outcomes, and some have perverse or indeterminate collateral implications that make it hard to classify them. moreover, these scenarios are not necessarily independent events. interactions between shocks can be complex and important ; and when it comes to the global financial crisis, nothing is simple. for example, howard davies ’ recent book documents 38 different things bis central bankers ’ speeches that went wrong during the global financial crisis. 1 many of these were inter - related, and those interrelations made the situation worse. but before we turn to the risks to our outlook, we will focus on what we think will happen over 2011, based on our view at the time of the latest monetary policy statement, updated for data over the last month. what we think will happen over the next year : the global financial crisis was a deep and damaging event. even in new zealand where we have been less affected, recovery has been slow and patchy. in fact, 2010 was a disappointing year : we initially saw recovery happening, but the second half went unexpectedly soft ( as it did in many oecd countries ). during 2011 we expect the recovery to pick up and gradually become more secure. the international outlook continues to be uneven. growth in the asian region has been strong but has brought its own difficulties with inflation and asset price bubbles building. the outlook for western and developed economies is still spongy as these economies slowly recover from the aftershocks of repairing damaged bank balance sheets and ongoing government fiscal exposures. commodity prices have reached very high levels, driven by emerging market demand. these high commodity prices generate stronger export revenue and provide a much - needed boost to incomes. however, farmers continue to use this income boost to repair balance sheets. indeed the business sector, broadly speaking, continues to behave cautiously, opting to rebuild company balance sheets rather than take on new investment. we think that investment will start to pick up in the second half of this year as confidence returns, but it is by no means clear how persistent business caution will remain. the national construction market remains very soft. but the picture for the next few years is dominated by the significant impact of the canterbury earthquake. major damage has been done to homes, businesses and infrastructure, with a conse

grant spencer : recent intervention by the reserve bank of new zealand in the foreign exchange market opinion article by mr grant spencer, deputy governor of the reserve bank of new zealand, 27 june 2007. * * * on 11 june, the reserve bank confirmed that it had intervened in the foreign exchange market to sell new zealand dollars. this was the first such intervention since the exchange rate was floated in march 1985. the bank ’ s 11 june announcement has prompted a lot of discussion and commentary around the objectives and impact of fx intervention. it is useful to clarify a number of issues around this subject. foreign exchange intervention is an ongoing process and the bank will not be commenting publicly on its specific intervention activities. we will, however, continue to release our financial accounts, which show the accumulated impact of the bank ’ s intervention activities. these accounts are posted on the bank ’ s website at the end of each month, with a lag of one month. under the bank ’ s policy targets agreement with the minister of finance, the bank seeks to avoid unnecessary variability in interest rates, output and the exchange rate as it goes about maintaining low inflation. the bank ’ s primary monetary policy instrument is the official cash rate ( ocr ). the foreign exchange intervention framework provides an additional tool for the purpose of trying to moderate the extremes of the exchange rate cycle. intervention operates at the margin, affecting the balance of demand and supply for the new zealand dollar. it can have an immediate downward impact on the exchange rate as it did on 11 june. that can help to moderate the “ peaks ” in the exchange and the length of time we spend at peak levels. it does not attempt to defend a particular level of the exchange rate. rather it sends a signal that, in the bank ’ s view, the exchange rate is out of alignment with the economic fundamentals. those speculating in the new zealand dollar need to be aware that the exchange rate is not a one - way bet ; they need to be cautious. the bank ’ s policy is to intervene only when the exchange rate is at exceptional levels ; when it is unjustified by medium term economic fundamentals ; when intervention is seen as consistent with the policy targets agreement ; and when market conditions make intervention opportune. in recent times, the new zealand dollar has been at levels that the bank regards as both exceptionally high and unjustified by the economic fundamentals. many businesses would agree. the high level of the exchange rate is creating challenging conditions for large