there was a lengthy period in which households saved progressively less from current income, increased their leverage and enjoyed a sense of rising prosperity from the increase in asset values. that was most likely a one - time, if rather drawn out, adjustment to a number of important factors. it is quite understandable that it occurred – and it should be equally understandable that it wasn ’ t going to continue like that indefinitely. the “ new normal ” – which is actually the old normal – is where households save a non - trivial fraction of income and keep their debt levels more in line with income. one positive is that the adjustment to this “ new / old ” normal has been pretty fast, which means that a lot of it may already have been accomplished. nonetheless, in view of the financial turmoil of recent weeks, it would not be surprising if a degree of caution remained for a while yet. bis central bankers ’ speeches three months ago, the bank voiced concerns over the outlook for inflation in australia, on the basis that measures of underlying inflation looked like they had ended a decline that had lasted for more than two years, were starting to turn up and were forecast to rise over the three - year forecast horizon. that outlook suggested that policy would need to be tightened “ at some point ”. the bank did not have a pre - committed notion of when that point might be. such indications are, in any event, always conditional on the ongoing assessment of the outlook. the policy decision must consider not only the central forecast but also the possibility that things turn out differently from that forecast. in the intervening period, the international situation has become more clouded and evidence of caution at home has, if anything, intensified. asset prices have declined, credit growth has moderated further and the exchange rate remains very high. while each of these is affected by factors other than monetary policy, together they suggest a fair degree of restraint is being exerted by financial conditions. under the circumstances, the board judged the most prudent course was to sit still through this period, in spite of inflation data that, on their face, continue to be concerning. looking ahead, the year - ended cpi inflation rate will probably remain well above 3 per cent in the september quarter. it is then likely to come down as the impact of last summer ’ s floods on food prices continues to unwind ; we will see those effects around the end of the year and the early part of next year. after that, the assumed impact of the carbon pricing

not only did yields on the obligations issued by so - called “ peripheral ” euro area countries reach new highs, but interest rates faced by large countries like spain and italy also rose to levels that would have made their financial positions much more difficult. the euro area ’ s response to these issues has had some positive effects, but it remains a work in progress. meanwhile, the united states is having a very difficult time finding a path that avoids an immediate major fiscal contraction but still puts the us fiscal accounts onto a sustainable medium - term trajectory. as financial markets confronted all this, and also sought to digest a re - appraisal of near - term global growth prospects, we have seen during august a period of intense turmoil, particularly in equity markets. the net result of this period is that equity prices in most markets around the world are anything from 15 to 25 per cent below their recent highs. yields on long - term securities for the united states and core european countries have fallen to historical lows as investors have sought safety, despite the us sovereign rating downgrade by s & p. measures of volatility have increased sharply. there has been a degree of renewed pressure on us dollar funding for european banks. the currencies of certain countries regarded as safe havens, like switzerland, have soared and the price of gold has reached new highs. so markets remain on edge. all that said, the dislocation has not, on most common metrics, approached the extent of that seen three years ago. the main effect on australia ’ s financial bis central bankers ’ speeches markets has been lower equity prices, which have fallen along with those in major markets. other australian markets have, to date, travelled fairly well in the circumstances. funding costs have, if anything, declined, which is being reflected in lower costs of fixed rate mortgages. major australian banks report being offered substantial us dollar funding offshore on account of their relatively high credit standing. in any event, their reliance on such wholesale funding is much reduced from three years ago, with the large increase in deposit funding at home and slower balance sheet growth. there has been no abnormal demand for liquidity by financial institutions from the reserve bank in this period and the quantity of settlement funds in the system has been completely normal over the past month. the exchange rate has come off its peaks of a couple of months ago, but it remains quite high compared with most of the post - float experience. some commodity prices have declined, but they have not slumped