to see why many market participants would feel that things have never been safer. but we should remember that it is in these circumstances where the biggest mistakes can be made. when everyone feels that risks are at their minimum, over - confidence can take over and elementary precautions start to get watered down. in addition, competitive pressures from those who under - estimate risk can push even the more prudent institutions into actions they will later regret. let me illustrate this point in relation to household borrowing. following the more than halving of inflation and interest rates that occurred over the past decade or so, there was a surge in household borrowing and an accompanying rise in house prices. we have examined this process at length before, so i will not go over it again tonight. during this process, banks and other lenders were able to grow their balance sheets rapidly and, despite narrowing margins, were able to record rising profits year after year. at some point, however, the surge in household borrowing had to slow, and house prices stabilise, or fall. that is what has been happening over the past three quarters, and it is an entirely helpful development. had the credit growth and house price growth of 2003 continued through 2004, the risks of future financial instability would have been much larger than is now the case. it is important that this slowing in household credit be accepted by financial intermediaries as a fact of life, even though it probably means the heady growth of profits from mortgage lending they have become accustomed to may not continue. there is a risk, however, that in attempting to resist the slowing in credit demand, financial intermediaries may be tempted to further lower lending standards, and that would carry with it serious medium - term risks. when i said earlier that lenders may be tempted to further lower lending standards, the use of the word further was deliberate. the incentives in the mortgage distribution system have changed in such a way that there has been a step - by - step reduction in credit standards over recent years. a significant proportion of mortgages are now sold by brokers who are paid by commissions on volumes sold. the growth of low - doc home loans means that intermediaries are now lending to individuals whose income is not substantiated. there has also been an upward drift in the maximum permissible debt - servicing ratio. when once a maximum of 30 per cent of gross income was the norm, now it is possible for borrowers on above - average income to go as high

of this review with you. the first conclusion is that last year ’ s monetary policy package is working broadly as expected and is supporting the economy. together, the bond purchases, the term funding facility, the 3year yield target and the record low cash rate have kept funding costs low for all borrowers and helped ensure that the banking system is able to provide the credit that is needed for the recovery. they have also resulted in a lower value of the australian dollar than otherwise. combined, the various measures have resulted in the rba ’ s balance sheet increasing from around $ 180 billion to $ 330 billion and a further substantial increase is in prospect ( graph 13 ). graph 13 5 / 7 bis central bankers'speeches the second conclusion is that very significant monetary support will need to be maintained for some time to come. it is going to be some years before the goals for inflation and unemployment are achieved. so it is premature to be considering withdrawal of the monetary stimulus. the third conclusion is that we will continue to purchase bonds issued by the australian government and the states and territories at the completion of the current $ 100 billion program in mid april. in reaching this conclusion, the board considered 3 factors : 1. the effectiveness of the bond purchases ; 2. the decisions of other central banks ; and 3. most importantly, the outlook for inflation and jobs. with 3 months experience now, it is clear that the bond purchase program has helped to lower interest rates and has meant that the australian dollar is lower than it otherwise would have been. so, it has worked. australia ’ s government bond markets also continue to function well and the available evidence is that further purchases would not be a source of market dysfunction. in terms of other central banks, most have recently announced extensions of their bond purchase programs, many running until at least the end of this year. given this, if we were to cease bond purchases in april, it is likely that there would be unwelcome upward pressure on the exchange rate. and, third, in terms of the most important consideration – the outlooks for inflation and jobs – we remain well short of our goals, as i have already discussed. given these considerations and the fact that the cash rate is at its effective lower bound, the board decided to purchase an additional $ 100 billion of government bonds at the completion of the current program in mid april. these additional purchases will be at the rate of $ 5 billion a week, which is unchanged from the current program. they will