compared with the forecast 4¾ per cent. in contrast, growth in aggregate output – at a below - trend rate of 2¼ per cent – was slower than we had expected. when we look at why output growth over 2011 was not as strong as forecast, well over half of the difference is accounted for by unexpectedly weak growth in exports, particularly of coal. it has taken longer than was originally expected to remove water from the flooded coal mines and for firms to take advantage of increases in port and rail capacity. as a result, despite all the talk about australia ’ s resources boom, the volume of resource exports increased by only 1 per cent over 2011. a much stronger outcome than this is likely both this year and next. bis central bankers ’ speeches but exports are, by no means, the full story. other factors were also at work, with more of the strong growth in domestic demand being met through overseas production – rather than domestic production – than was originally expected. an important factor here has been the composition of the growth in demand. as i mentioned a moment ago, growth in aggregate demand was pretty close to what was expected. however, the composition of that growth contained a few surprises. in particular, while the reserve bank had long expected a very large lift in investment in the resources sector in 2011 – and this indeed occurred – the increase was even larger than had been forecast. as one indication of the very strong outcome, the abs estimates that engineering investment increased by almost 50 per cent over 2011. on the other hand, growth in demand not directly related to mining investment was not as strong as was forecast. the biggest surprise was probably in terms of home building. we had expected dwelling approvals to pick up gradually over 2011, but this pick - up did not eventuate. one possible explanation for this is that it is one of the side effects of a return to more traditional savings and borrowing behaviour by households. this change in behaviour is having ripple effects through the economy, including through a lowering of expected capital gains on housing. this has made developers, financiers and households less willing to commit to new construction despite rising rental yields, lower prices relative to income and ongoing growth in population. while, at some point, the improving fundamentals should generate a pick - up in home building, the recent forward - looking indicators do not suggest that this is imminent. another other area that was weaker than expected was private business investment outside the resources sector. this partly reflects the decline in business confidence

current relatively low unemployment rate, it is likely that conditions will continue to vary significantly across industries for some time to come. this work also serves as a reminder that improving productivity growth remains the key to strong output growth in the non - mining - related parts of the economy. it also suggests that there is some scope for non - mining - related demand to grow a little more quickly than has been the case in the recent past. monetary policy i would like to draw all this together, with a few remarks about monetary policy and the reserve bank ’ s latest forecasts. in the first half of 2011, our judgement was that strong growth in demand, together with evidence that inflation had picked up, required mildly restrictive financial conditions. as the year progressed though, and it became evident that this strong demand growth was not putting the expected pressure on domestic capacity and thus prices, the board eased monetary policy, lowering the cash rate in both november and december. and then following the recent cpi data which provided confirmation of the subdued inflation pressures, the board lowered the cash rate by a further 50 basis points, bringing the cumulative decline since november to a full percentage point. over this period, most lending rates in the economy have fallen by around three - quarters of a percentage point and are now at slightly below - average levels. the bank ’ s latest inflation forecast is for underlying inflation, abstracting from the effects of the carbon price, to stay close to its recent rate over the next one to two years. given that the disinflationary impact of the appreciation of the exchange rate on prices of imported goods is likely to lessen over time, this forecast incorporates some moderation in domestically generated inflation pressures. in particular, it is based on an expectation that productivity growth will pick up somewhat as firms respond to the difficult trading environment that many currently face. it is also based on an expectation that the current pressures on margins being experienced by many firms in the non - mining - related parts of the economy will work their way up the production chain, leading to some moderation in growth in input costs, including in the cost of labour. in terms of output, overall gdp growth is expected to return to around trend over the forecast horizon, with the recent reductions in the cash rate providing some boost to demand in the non - mining - related parts of the economy. however, it does seem likely that growth in some sectors will remain below the average experienced over the past couple of decades. how things develop will depend importantly on the