Rising commodity prices and a New Zealand dollar - which has hit a two-month high of US78.3c - will continue benefitting New Zealand's economy, according to Reserve Bank governor Alan Bollard.
Dairy giant Fonterra yesterday announced that by mid-July it will have seven products available for its fortnightly global online auction, the latest additions being milk protein concentrate, rennet casein and cheddar cheese, the latter requiring further processing and not for immediate retailing.
While Fonterra's global auction has seen some price declines during its past two auctions, Dr Bollard said overall the country's agricultural export prices were likely to remain strong for some time.
"Global commodity prices have experienced the largest boom in more than 100 years.
"While hard commodities have seen the biggest surge, agricultural commodity markets have also seen a fundamental change," he said in a statement yesterday, following a speech to farming groups in Ashburton.
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 ever been", NZPA reported.
"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 in Australia had also been helped by this country's competitive exchange rate with Australia.
Dr Bollard said the exchange rate would deliver the benefits of the rising terms of trade to the community at large, through higher wealth and cheaper imports.
While upbeat about the effects of high commodity prices for exporters and the strength in the New Zealand dollar, Dr Bollard also warned it was "fiendishly difficult" to predict commodity prices and any subsequent increased consumer spending could prompt inflationary pressure.
"Given this outlook, monetary policy will remain focused on any medium-term inflationary pressures that arise, rather than the terms of trade shift in itself," Dr Bollard said.
While bank analysis indicated agricultural export prices were likely to remain elevated for some time, in the near-term, prices could fall slightly as supply became less weather-disrupted but demand was underpinned by urban and wealth growth in developing countries, especially China, he said.
However, monetary policy would need to counteract any rise in inflation expectations, which meant rate hikes to the interest-driving official cash rate.
"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," Dr Bollard said.
