* RBNZ says policy focus on medium term inflation
* RBNZ says NZ$ reflects rising terms of trade
* No policy change expected (Adds details, background)
WELLINGTON, April 12 (Reuters) - New Zealand's central bank highlighted on Tuesday the inflation danger from rising terms of trade, but said its interest rate focus was still aimed at the medium term, giving the local currency a modest boost.
New Zealand's economy is struggling to recover from a prolonged downturn, exacerbated this year by a devastating earthquake, but one of its current strengths is a strong rise in the terms of trade which has also buoyed the New Zealand dollar.
"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," Reserve Bank of New Zealand (RBNZ) head Alan Bollard said in speech notes released by the central bank on Tuesday.
"Monetary policy would need to counteract any rise in inflation expectations."
The New Zealand dollar firmed modestly after the notes were released and last traded around $0.7820 from $0.7790.
Interest rate futures <0#NBB:> fell as many as eight ticks for year-end contracts, and swap rates rose as much as 6.5 basis points.
Financial market pricing implied 56 basis points of rate rises over the next 12 months from the previous 47 basis points , although there is no chance of a rate move seen at the April 28 review.
The Treasury department said last week the country's external accounts were benefiting from a strong export showing, with terms of trade hitting a 37-year high in December.
Annual inflation rate jumped to 4.0 percent in the December quarter, the highest level in more than two years following a rise in sales tax.
The RBNZ, which is required to keep inflation within a 1-3 percent target band on average over the medium term, has said it will look through this policy-driven spike in inflation.
Goldman Sachs economist Philip Borkin said there were no immediate policy implications from the speech, because higher incomes from the terms of trade were being used to reduce debt rather than boost consumption and inflationary pressures.
"Until evidence to the contrary emerges, we believe the RBNZ will be happy maintaining stimulatory monetary policy for a little longer," he said.
The RBNZ last month slashed its cash by 50 basis points to 2.5 percent to help cushion the economy and sentiment after the deadly Feb. 22 earthquake struck the country's second-biggest city, Christchurch.
A Reuters poll has a median expectation of the first rise in the first quarter of next year although there is a sizeable minority view of a hike as early as December this year. (Reporting by Gyles Beckford; Editing by Mark Bendeich)