while here we look at the impact of a stimulus package in isolation, in practice a large stimulus would be most likely if growth prospects in china were to deteriorate for some reason. in that case, the impact on the australian economy would differ from the scenario. graph 4 graph 5 r e s e r v e b a n k o f au s t r a l i a scenarios and monetary policy the goal of all this work is ultimately to help inform good monetary policymaking. i ’ ve already explained how scenarios help us understand and communicate the importance of different risks to the outlook8 and the economy ’ s sensitivity to different channels. for example, the china fiscal stimulus scenario shows how australian outcomes might be affected by chinese policy, and how transmission of the stimulus might be sensitive to movements in the exchange rate. i will focus now on how scenarios can inform the policy decision itself. clearly, central forecasts are important inputs to monetary policy decisions. but the extent of uncertainty means it ’ s equally important for policymakers to consider alternative scenarios, their likelihood and how their strategies might need to adapt. the key point is that scenarios help to make the link between forecast risks and policy strategy. that helps the board think through policy options and communicate their thinking. in particular : • scenarios allow policymakers to consider how to make their strategy more robust to key risks materialising. that might mean choosing a policy strategy that performs well – in terms of inflation and employment outcomes – under a range of possible scenarios, rather than just in the most likely central forecast. • scenarios can also help the board communicate how policy settings might need to respond if the economic outlook unfolds differently to our baseline. as flagged earlier, in economist - speak they can help the board to communicate its reaction function to financial market participants and the public, helping them understand what might happen to interest rates over time. for example, the november board minutes show examples of the board considering alternative risks to the outlook for household spending and the labour market, and mapping those through to the potential consequences for policy. 9 to make this more concrete, graphs 6 and 7 provide an illustration of the sort of scenarios we might look at to map from risks to possible policy responses. i should emphasise that these are not actual scenarios the board has considered – while some central banks publish the alternative policy paths that inform their decisions, the rba has not yet done so. the graphs show hypothetical policy responses to illustrative scenarios where demand and therefore inflation

many factors. at this stage, there is still a significant degree of labour market slack and weak productivity developments that keep a lid on wage growth. 2 / 3 bis central bankers'speeches furthermore, the process of setting wages is to some extent backward - looking in a number of euro area countries, reflecting formal and informal indexation mechanisms. 3 additionally, the timing of wage negotiations plays a role. wage negotiations often have a multi - year horizon ; given that headline inflation remained below 1 % for 38 consecutive months until december of last year, it is going to take some time for an increase in headline inflation to translate into second - round effects on broader inflation. moreover, weak wage growth could also reflect previous downward wage rigidities : difficulties in reducing wages during the crisis may result in a slower upward adjustment of wages as labour market conditions improve. 4 just as our monetary policy measures have effectively underpinned the economic recovery, they have also prevented the prolonged period of disinflationary pressures from turning into a sustained period of deflation. in fact, the accommodative monetary policy stance appears to be increasingly visible in developments in inflation expectations, which are showing signs of reversal from previous flat or negative trends, while also reflecting changes in the global environment. for example, market - based measures of euro area inflation expectations have been trending upwards since early september, while survey - based measures of inflation expectations continue to signal an increase of inflation. so while we are certainly seeing a firming, broadening and more resilient economic recovery that will in time translate into a durable increase in inflation, we cannot ignore the fact that one of the main forces behind the upward inflation trajectory that we expect to see over the medium term is monetary policy itself. the economic recovery and the outlook for price stability are still predicated on the very favourable financing conditions that to a large extent depend on continued monetary policy support. therefore, we need to look through the volatility in short - term data resulting from transitory factors in order to assess whether progress towards a durable and self - sustaining convergence in the path of inflation has been sufficient. with this aim in mind, the governing council reaffirmed at its last meeting that the asset purchase programme will continue until the end of december 2017, or beyond, if necessary, and in any case until we are sufficiently confident that inflation converges towards levels below, but close to, 2 % over the medium term and that this process will not reverse under less supportive monetary policy