exchange rate, measured on a trade - weighted basis, adjusted for the relative prices between new zealand and our trading partners. this captures the fact that new zealand faces many exchange rates, and a weighted measure of individual bilateral exchange rates is necessary to summarise the country ’ s exchange rate position. 25 for discussion on the role of the exchange rate as a shock absorber, see : karagedikli, et al. ( 2013 ). 26 the drivers of new zealand ’ s exchange rate are examined in mcdonald ( 2012 ). 27 graham & steenkamp ( 2012 ) outline the macroeconomic balance model. 28 for discussion on recent developments in new zealand ’ s nfl, see bascand ( 2017 ). 29 for discussion surrounding drivers of core inflation in new zealand, see kirker ( 2010 ). 30 a number of core inflation measures are discussed in ranchhod ( 2013 ). 31 “ the sectoral factor model provides a measure of core inflation that distinguishes between price movements in the two major sectors of the economy, and hence helps to identify where inflationary pressures are coming from. ” ( price, 2013, pg. 2 ). 32 for further details on the econometric assessment of the sectoral factor model, among others, see kamber & wong ( 2016 ). 11 / 11 bis central bankers'speeches

bank ’ s medium - term outlook for key economic variables ( such as the terms of trade ). however, it yields no further reduction in nfl - gdp from its current level. a lower new zealand dollar would be needed to lower nfl - gdp and our external vulnerabilities further. indeed, from a growth point of view, a lower real exchange rate would help rebalance growth towards the tradables sector, especially as not all traded industries are benefiting from the current high terms of trade. 28 π * – core inflation as noted earlier, monetary policy typically has little influence on many underlying trends in the economy. but it does influence inflation, and expectations about future inflation, even if we cannot influence every price. a useful concept for a flexible inflation - targeting central bank is core inflation, which abstracts from one - off or highly volatile price movements, like large changes in the price of an individual product ( e. g. oil ). this is important because while idiosyncratic price 6 / 11 bis central bankers'speeches movements can materially affect headline cpi inflation, they may not reflect fundamental or persistent sources of inflation pressure. consequently, central banks often use core inflation as an important measure of inflation over which it has some control. 29 specifically, core inflation abstracts from noise and provides a clearer picture of how far inflation is from our objective under the policy targets agreement. because inflation is affected by factors outside of the bank ’ s control, and people ’ s expectations need not coincide perfectly with the bank ’ s mediumterm objective, we monitor a range of core inflation measures to gauge current inflation pressure. the measures of core inflation we examine include, among others, model - based measures and exclusion - based measures. 30 the model - and exclusion - based measures reflect the current central tendency of price movements, while other measures focus more directly on future ( beliefs about ) inflation outcomes. our sectoral factor model reflects, in part, both concepts of core inflation. 31 the sectoral factor model is our preferred measure of core inflation because it best predicts where headline inflation will converge to in the future once the transient noise dissipates, and is smoother than our other ( relatively ) more volatile core inflation measures. 32 based on this measure, core inflation is currently estimated to be 1. 4 percent ( figure 5 ), and has broadly tracked sideways over the past year. so while inflation pressures have lifted from the lows seen in early 2015, they still appear to be relatively