mr. brash discusses fluctuations and long - term trends in exchange rates and their effects on export commodities and comments on the reserve bank ’ s monetary conditions index address by the governor of the reserve bank of new zealand, dr. donald brash, to the counties kiwifruit growers association in pukekohe on 22 / 8 / 97. mr chairman, i am delighted to be back in pukekohe, though i must admit i ’ d rather be next door in my orchard instead of in here, explaining the impact of monetary policy on the fruit - growing industry! two months ago, when you asked me to speak this afternoon, you asked me to focus on exchange rates. in particular, you suggested i speak about ‘ fluctuations and long term trends in exchange rates and their effects on export commodity pricing ’. i am happy to do that, but i also want to make a few comments on the reserve bank ’ s monetary conditions index, both because it is relevant to the subject you have asked me to address and because the mci has become the subject of a good deal of public discussion and debate over the last month or two. indeed, some claim it is only the reserve bank ’ s obsession with the mci that has seen exchange rate and interest rates pushed around in a rather volatile manner over the last couple of months. the exchange rate first let me talk a little about the exchange rate. here the concerns seem to be partly about fluctuations in the exchange rate and partly about the long - term trends, as your suggested subject for my speech indicates. i have to say that i do not have a great deal of sympathy for those who complain about the fluctuations in the exchange rate, and that for two quite different reasons. first, and most obviously, there is now a very well - developed market in forward foreign exchange contracts, so that it is readily possible for exporters to fix the exchange rate at which they sell their products long before they actually want to repatriate the proceeds to new zealand. exporters may, of course, choose not to use that market and instead gamble that they might get a more favourable exchange rate at some stage in the future. they should be free to make that choice. but it is important to recognise that they are deliberately taking on foreign exchange risk in the hope of getting something better in the future. they are not obliged to gamble in this way. this point is perhaps particularly relevant at the moment, when a number of farmers are lame

end of this year : through all of last year, until 10 december, we were targeting inflation at between 0 and 2 percent, with a mid - point of 1 percent, because that ’ s what our policy targets agreement with the government required at that time. we were battling to reduce inflation, which had been somewhat above the top of that range throughout 1996. given that it takes a minimum of 12 months for monetary policy to have its impact on inflation, it would be surprising if inflation were not projected to be moving towards 1 percent at the end of this year. the inflation projection which the bank published at the end of june was not only based on monetary conditions being around 825 on the mci during the september 1997 quarter, it was also based on a particular combination of interest rates and exchange rate. we assumed that, during the september quarter, the trade - weighted exchange rate would average around 67. 3, and 90 day interest rates would average around 7 percent. we also explicitly recognised that if the mix of conditions changed, the short - term track of inflation could be different. with the exchange rate in fact significantly lower than assumed in the june monetary policy statement, and interest rates significantly higher than assumed, it is possible that the immediate inflation track may be a little higher than projected in june because of the impact which the lower new zealand dollar may have on the prices of goods like television sets, cars, and other imports. in other words, a lower dollar may increase inflation more quickly than higher interest rates will reduce it. although there are many people who feel that monetary conditions are inappropriately tight, and some who just feel that the combined wisdom of financial markets is more likely to be right than is the reserve bank, it is worth recalling that for the first four months of 1997, until the very end of april, financial markets kept monetary conditions appreciably tighter than the bank had indicated was necessary or appropriate, despite our saying that we would be happier if conditions were somewhat easier. in other words, financial markets are not infallible. it is interesting that in the latest consensus survey of new zealand forecasters, representing views in mid - july 1997, 39 percent felt that conditions were unduly firm, but 54 percent felt that they were about right - and conditions have eased somewhat since that survey was conducted. monetary conditions have eased substantially over the last six or eight months from an average of 1000 on the mci in the december 1996 quarter to an average during the first half of