4  BIS central bankers’ speeches  inflation from reaching more than three percent by the end of 2006 (Figure 2). We could perhaps have leaned harder against this expansion at the time, but this would probably have exaggerated the exchange rate cycle on both the upswing and the downswing. We draw several lessons from this experience.
One is that when there are strong forces on the New Zealand economy, policy settings may need to lean quite hard against them. A second is that financial cycles can be surprisingly large and long-lasting. A third is that such forces in a small open economy can cause large exchange rate swings. Difficult judgements must be made about the balance across the trade-offs.