Dairy farm incomes this season are expected to be about $ billion lower – equivalent to a 2.2 percent decline in national income3. Despite this, in August, New Zealand’s real effective exchange rate was 1 percent higher than its February 2014 level. 3  Dairy exports account for almost a third of New Zealand’s annual merchandise exports.
In current conditions, however, liquidity primarily takes the form of precautionary balances that certain banks are deliberately holding with the Eurosystem. As long as central bank liquidity serves at least in part banks’ precautionary motives, this extra liquidity will not result in higher inflation in the future. These considerations bring me to the second aspect of our non-standard policies: the conditions for their unwinding.