But the reference to delivering inflation to ‘somewhere close to the middle part of our inflation target in six to eight quarters’ time’ is a recognition that what we should be mainly concerned about is not the direct price effects of movements in the exchange rate but rather the longer term effects which arise out of the way in which changes in the exchange rate affect the demand for goods and services produced locally.
Thus, for example, a depreciation in the exchange rate will have two kinds of effects on local prices. First, it will tend to push up prices for imports and exportables as the local currency equivalent of unchanged international prices increases. In New Zealand, these price effects tend to come through into consumer prices within about a year.