Bollard points to benefits of strong NZ dollar

A speech by Reserve Bank Governor Alan Bollard to farmers in Ashburton is being seen as reassurance interest rates will not rise just because agricultural commodity prices are high.

But Dr Bollard did warn of the risk that action would be needed if households and firms used an income boost from higher commodity prices and exchange rates to bring forward consumption and investment, or increase borrowing.

Were that to happen, pressure on resources would lead to more inflationary pressure. Monetary policy would need to counteract any rise in inflation expectations, Dr Bollard said.

Monetary policy would remain focused on medium term inflationary pressures.

Agricultural export prices were likely to remain strong for some time, delivering benefits to the economy, he said.

The Reserve Bank expected the higher terms of trade to continue to be reflected in the exchange rate, which would deliver the benefits of the rising terms of trade to the community -- through higher wealth and cheaper imports.

Reserve Bank analysis indicated agricultural export prices were likely to remain elevated for some time.

Although in the near term, prices could fall slightly as supply became less weather-disrupted, demand was underpinned by urban and wealth growth in developing countries, especially China.

"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," Dr Bollard said.

TD Securities senior strategist Roland Randall said Dr Bollard was clearly speaking for the benefit of his audience of farmers.

"Our interpretation is that he was saying that farmers should not worry that just because they are receiving very good prices they will therefore be slugged with higher interest rates," Mr Randall said.

"RBNZ will only react if they see signs of higher than comfortable consumption, investment and/or borrowing."

Finance Minister Bill English said that while the high NZ dollar had been a headwind for the recovery from the start, it was fortunate that commodity prices were "higher than they've every been".

"We can see the export sector is making progress. It's going to become profitable as it gets its debt levels right. Of course that could happen faster if the currency was lower," Mr English said.

Manufacturers and those selling services into Australia had also been helped by this country's competitive exchange rate with Australia.