pace of growth in labour costs overall has remained relatively contained. in thinking about why growth has picked up somewhat more than had been expected, we should not overlook the fact that the global economy has surprised, once again, by its strength. the most recent forecasts for global growth made by the imf were revised upward only a few weeks ago, with growth now thought likely to be over 5 per cent in 2007, close to the 2006 result. the us economy has slowed but greater strength elsewhere has, to date, more than outweighed the us softening. australia ’ s terms of trade have kept rising and stand at a five decade high. this has added about 1½ per cent of gdp to the annual growth in australia ’ s national income over the past couple of years, which is quite an expansionary force. some of the resulting demand spills abroad, but there is also a stimulus to spending on non tradeable goods and services arising from the income gains being experienced. the rise in property prices in western australia is a case in point. it would be imprudent to assume that this trend will continue indefinitely. nonetheless, it has already gone considerably further than most observers anticipated. when we lift our gaze beyond the conventional forecasting horizon, the big picture is that the emergence of potentially very large economies like china and india, at such a rapid pace and with such consistency, is unlike anything we have lived through before. we cannot be confident, therefore, that the cyclical experience of the past few decades is necessarily a reliable guide to how things will develop. in its policy deliberations over several months, the board has weighed conflicting trends. when we were last before you, we were observing an apparent moderation in inflation. we were, as you know, at that time still of the view that there could be a need to tighten monetary policy further at some stage. but having made three adjustments in 2006, we believed that the improving short term trend in inflation afforded us time to watch developments. information that came in over the ensuing period suggested stronger than expected demand in the economy. this meant that the longer term risk of higher inflation was increasing, not diminishing. hence, the likelihood that interest rates would need to be increased at some stage was rising. moderate price and wage outcomes continued, however, for some months, suggesting that, at least temporarily, the supply side of the economy was managing to respond to stronger demand. it was doubtful that this could continue over an extended

earned, and then a bit more. this could hardly be said to be normal, or sustainable. more recently, the saving rate has increased and it is back to the level it was in the mid 1980s. bis central bankers ’ speeches graph 2 the third graph shows household debt and household wealth relative to household disposable income ( graph 3 ). here, the story is similar. from around the mid 1990s to the mid 2000s, the value of both our assets and our liabilities grew much more quickly than our incomes. but because the value of our assets increased at a faster rate than the value of our liabilities, there was a large increase in measures of household net wealth relative to income. again, such a large adjustment is unusual. in recent times, the steady rise in the various ratios has stopped and they are now roughly back to where they were a decade ago. graph 3 bis central bankers ’ speeches the fourth graph is of the share of the dwelling stock that is sold each year ( graph 4 ). during the latter part of the 1990s and the first part of the 2000s, turnover in the property market was much higher than average. more than ever before, we moved houses or bought and traded second properties, either as an investment or as a holiday property. the high rate of turnover boosted many parts of the economy, including the real estate sector and parts of the retail sector. it also boosted state government finances due to higher stamp duty revenue. over the past few years, turnover has declined and has been around half the rate that it was in the early 2000s. graph 4 the fifth graph is of the share of the working - age population that has a job ( graph 5 ). again over the period from the mid 1990s to the mid 2000s, employment consistently grew much more quickly than the working - age population. while this partly reflects a rise in labour market participation by females, this type of experience, sustained over a long period, is unusual. and, as in some of the other graphs, we see a levelling out in this ratio over recent years. bis central bankers ’ speeches graph 5 finally, the sixth graph shows the increase in our living standards – measured by the rise in real income per hour worked – together with the increase in productivity ( graph 6 ). something rather unusual has happened here too, although the timing is a little different from that in the previous graphs. over the past decade there was a decoupling of the link between advances in our living standards