and relatively low unemployment rate and inflation at target. by the standards of most other countries, this represents a very good outcome and a high degree of internal balance. remarkably, we have achieved this balance despite experiencing the biggest boom in business investment and the largest rise in the terms of trade for over a hundred years ( graph 1 ). in the past, much smaller investment and terms of trade booms caused outbreaks of inflation and the emergence of other imbalances in the economy. on this occasion this has not happened. the investment boom has not led to a large increase in the current account deficit. there has not been an explosion in credit. increases in asset prices have generally been contained. and the average level of interest rates has been below the long - term average, despite the very significant additional demand generated by the record levels of investment and the terms of trade. bis central bankers ’ speeches graph 1 there are a number of factors that are important to understanding how domestic or internal balance has been maintained, with generally low interest rates, despite the very large shocks experienced by the australian economy. this morning, i would like to focus on just two of these. the first is the flexible exchange rate. the high levels of investment and commodity prices have been associated with a high value of the australian dollar. this has clearly caused some difficulties for parts of our economy, including the manufacturing, tourism and education sectors. but from an overall macroeconomic perspective, the appreciation of the exchange rate has played an important stabilising role. had we not experienced the sizeable appreciation over recent years, it is highly likely that the economy would have overheated and that we would have had substantially higher inflation and substantially higher interest rates. this would not have been in the interests of the community at large or, i might add, in the interests of the sectors currently being adversely affected by the high exchange rate. it is also worth adding that, in any case, it is unlikely that we would have avoided a substantial real exchange rate appreciation, with it coming through the more costly route of higher inflation. this, of course, does not mean that, at each and every point in time, the exchange rate is at its ideal rate from a domestic balance perspective. we should not forget that exchange rates are relative prices between two countries ’ moneys. this means that they are determined both by what is happening domestically and by what is happening abroad. this has been obvious over recent years, with the very accommodative

the financial system to fully recover and adapt to the important set of reforms implemented since the onset of the crisis, before making further changes. this would be consistent with the approach chosen by the governors and heads of supervision in their recent statement that new regulatory reforms should “ not significantly increase overall capital requirements ”. european commission, directorate general for economic and financial affairs ( 2012 ), fiscal sustainability report, european economy, no. 8 ; imf ( 2014 ), fiscal monitor, april ; lanotte et al ( 2016 ), cit. bis central bankers ’ speeches note : foreign holders, alternative definition : foreign holders excluding eurosystem and round - trip foreign portfolios and funds, i. e. securities held by foreign investors net of those held by the eurosystem ( excluding the bank of italy ) and those held by foreign individually managed portfolios and investment funds but attributable to italian investors. bis central bankers ’ speeches