volume of exports per kilogram of milk produced source : statistics new zealand, dcanz, rbnz estimates. strong growth in dairy receipts creates benefits for others, such as rural communities, rural service providers, machinery retailers, and financial institutions. there are also significant indirect effects on the broader economy through additional spending and upward pressure on the exchange rate. i ) new zealand ’ s exchange rate an important factor behind the rise in new zealand ’ s exchange rate has been the strength of the terms of trade ( which measures the ratio of export prices to import prices, both in nz dollar terms ). our terms of trade are at their highest level since 1973 and are 20 percent above the average level of the 1990s. dairy prices account for just under half of the anz commodity price index ( though a smaller share of goods and services exports ) so changes in global dairy prices have a major effect on the terms of trade and, in turn, the nz dollar exchange rate. figure 3 shows the close relationship between movements in the terms of trade and the exchange rate. other factors also affect the value of our currency. an important structural factor affecting the long term level of the exchange rate has been the persistent gap between national savings and investment. over the past 40 years new zealand has demanded more capital for investment in housing, infrastructure, and other assets than its national savings could finance. this has meant an ongoing reliance on foreign saving via inward capital flows, placing upward pressure on interest rates and the exchange rate. bis central bankers ’ speeches our current high exchange rate also reflects the relative strength of new zealand ’ s economic performance and the consequent upward pressure on our interest rates relative to those in other advanced economies. figure 3 : twi and terms of trade source : statistics new zealand, rbnz. a key issue is whether the strong increase in global dairy prices represents a permanent shift, or whether it reflects cyclical elements. we believe both factors are present. structurally, the demand for protein is rising rapidly in middle income countries as per capita incomes and urbanisation increase. china ’ s 50 percent increase in dairy imports in 2013 reflects this structural change, as well as sluggish growth in chinese milk production as small, inefficient producers leave the sector as part of the government ’ s efforts to raise the quality of raw milk production. but cyclical or temporary factors are also in play. these include the 2013 drought in new zealand, severe climatic conditions in asia, and an outbreak of foot and mouth

meet disaster claims. this is backed up by a government guarantee if more funds are needed. the government also decided in april to support ami ( the biggest residential insurer in the christchurch bis central bankers ’ speeches region ), in order that policyholders with earthquake claims could have certainty that their valid claims would be paid. the magnitude and ongoing nature of the earthquakes raise a number of challenges for the insurance sector, and potentially the economy more generally. a number of insurers have suffered significant hits to their balance sheets. on the other hand it appears that the international reinsurance market has worked as we would hope, bearing in mind that we have now suffered a series of insurance “ events ”. following the canterbury earthquakes there have been both temporary and longer term changes in the insurance market. while the ground is still moving, there is limited availability of new cover for earthquakes in the christchurch area. for most businesses and households this means they are not free to change insurers at present, while for those currently without insurance cover the impact is more significant. some earthquake - prone buildings and infrastructure can no longer get insurance cover in canterbury or elsewhere in new zealand. other changes to date include higher nationwide premiums to fund increased reinsurance costs and bigger excesses. property insurers that have had their reinsurance program renewing since february, have generally been able to maintain or increase their reinsurance cover. however, reinsurance premiums have more than doubled, and in many cases a higher retention ( claims borne by the insurer before reinsurance starts to pay out ) also applies. we are now seeing delays in payouts and some litigation around liabilities. this may look untidy, but it may also be inevitable in such a complex situation. the effects on economic activity the earthquakes have resulted in severe disruptions to short term economic activity, and a loss in balance sheet values, but will bring significant stimulus in the medium term. disruption was mainly due to reduced household and business spending, as well as lost exports and production in canterbury. furthermore, following the earthquakes we saw sharp declines in consumer confidence and business sentiment economy - wide. sectors most affected have been tourism, education and central business district retailing. encouragingly, however, some of the significant contributors to canterbury ’ s economy, particularly agriculture, manufacturing and professional services have been remarkably resilient after the first few weeks. construction and related services have been through a frustrating period of disruption and prolonged wait. but next year they will enter an era