Ag exports to boost economy for 'some time,' could stoke inflation – Bollard

In a speech to an Ashburton farming group, Dr Bollard said the bank’s analysis indicates agricultural export prices are likely to remain high for some time.

Those higher prices are reflected in the exchange rate, which is also expected to stay comparatively higher than over the past 30 years or so.

An accompanying paper by Reserve Bank staffers Richard Sullivan and Tim Aldridge, says New Zealand terms of trade – currently at rates not seen since the 1973 double whammy of an oil shock and the United Kingdom joining the European Union – will stay high for some time.

Growing demand from China and other rapidly developing countries “will increase worldwide demand for proteins and high quality cereals, like wheat. In the short-to-medium term this demand is likely to outstrip potential supply growth (rebound from adverse weather events notwithstanding). 

Herd rebuilding in Australia and the US will keep meat supplies relatively constrained for some time, while European production of agricultural products is likely to remain subdued until the next round of CAP reform (due in 2020).”

Prices are, therefore, likely to stay high for some time.

“Overall, it seems likely that terms of trade will persist around current ‘high’ levels for the foreseeable future. However, this is only returning the terms of trade to the levels seen in the 1960s and 1970s. Indeed, rather than current levels being viewed as high, it is more likely that the terms of trade during the 1980s and 1990s were very low.”

However, there is no guarantee this will continue indefinitely – countries such as China and India are likely to begin boosting their own agricultural production as a response to the higher prices.

And New Zealanders benefiting from the higher export incomes should be careful how they use the income.

“If households and firms use the income boost from higher commodity prices and exchange rates to bring forward consumption and investment, or increase borrowing, then pressure on resources in New Zealand would lead to more inflationary pressure. Monetary policy would need to counteract any rise in inflation expectations.

“One thing we do know is that the projection will remain uncertain. History shows it is fiendishly difficult to predict the future path of commodity prices.”