the average and the medium term. we have never sought to have inflation always between 2 and 3 per cent. the rba adopted flexible inflation targeting before other central banks, and this flexibility has served us well. it has allowed the board to set monetary policy so as best to achieve its broad objectives, with the ultimate aim of contributing to the economic prosperity and welfare of the people of australia. it has also allowed the board to look through temporary factors affecting inflation. this flexibility, however, is not boundless. the point of our inflation target is to provide a strong medium - term anchor that helps deliver low and stable inflation, which, in turn, is an important precondition to sustainable growth in employment and incomes. if inflation stays too low for too long, it is possible that inflation expectations move lower – that australians come to expect sub2 per cent inflation on an ongoing basis. if this were to happen, it would be harder to achieve the medium - term inflation goal. so we need to guard against this possibility. moving on to our conclusion about spare capacity in the labour market. for some years, most estimates of full employment, including our own, equated to an unemployment rate of around 5 per cent – it was thought that if unemployment went below that for too long, inflation would rise and become a problem. but, given the combination of the labour market and inflation outcomes we have seen of late, our judgement now is that we can do better than this – that we can sustain an unemployment rate of 4 point something. it is also worth noting that the supply side of the labour market is turning out to be more flexible than we had earlier expected. the recent evidence is that when jobs are there, more people join the labour force and other australians stay in work longer. reflecting this, the participation rate is currently at a record high, despite demographic shifts that we anticipated would reduce participation. it is also the case that people are prepared to work extra hours when there is strong demand for their labour. together, these observations support the conclusion that there is still spare capacity in the labour market and this is likely to remain the case for a while yet. the recent data have given us more confidence in this assessment and we have responded to this. 2 / 4 bis central bankers'speeches over the past few years, one concern has been that lower interest rates could add to the medium - term risks facing the australian economy as a result of high household debt. we need to keep a close eye

it is important that we keep focused on this. i will now change tack and move to the third question : should today ’ s reduction in the cash rate be fully passed through to mortgage rates? my usual practice in answering this question has been to explain that there are a range of other factors that influence mortgage pricing, and then say ‘ it all depends ’. there are often reasonable explanations for why the standard variable mortgage rate does not move in lock - step with the cash rate. today, though, i would like to break with my usual practice and provide a clearer answer. and that is : yes, this reduction in the cash rate should be fully passed through to variable mortgage rates. this answer is based on recent reductions in bank funding costs. not only have these costs declined as a result of the change in monetary policy, but they have also declined because of 3 / 4 bis central bankers'speeches movements in market - based spreads. last year, these spreads increased and most lenders responded by increasing their standard variable rates by around 15 basis points. over recent months, these spreads have reversed all the increase that occurred last year and returned to their 2017 levels. the result is that there has been a substantial reduction – at both the short end and the long end – in the cost of banks raising funds in wholesale markets. average rates on retail deposits have also come down. this means that the lower cash rate should be fully passed through into standard variable mortgage rates. full pass - through would also mean that the economy receives the full benefit of today ’ s policy decision. that brings me to the final question : what about the savers, have we forgotten about them? i know this question is on the minds of a lot of australians, especially older australians. i am reminded of this daily as people write to me telling me how the already low deposit rates are affecting their income. i am expecting to receive more such letters and emails after today ’ s decision. the board had a thorough discussion of this issue at our meeting today. we recognise that many australians have saved hard and rely on interest from term deposits to support their income and spending. today ’ s decision will reduce their income from this source and we understand why they would be disappointed with the outcome of today ’ s meeting. at the same time as paying close attention to this issue, the board considered what was best for the overall economy. our judgement is that lower interest rates will help the economy as a whole. at the moment, this benefit is