we feel the need slavishly to follow every interest rate move of the major countries – the record shows otherwise, as i will shortly demonstrate. but the environment in which the australian economy and financial markets operate is heavily affected by events and policies in the major regions. i have in mind here not so much short - term factors, but the lower - frequency, more persistent forces at work. even the most casual review of the rationale for our decisions over the years would reveal a keen sense of the importance of international factors for the australian economy. it sometimes surprises us how many local market and media commentators place rather little weight on these forces. the second observation is the value of the information of a qualitative nature gained by talking directly to firms, industry associations, state government departments and so on. this is in addition to the insights the non - executive members of the board bring from their other activities. the staff in our regional offices have built up a pool of over 1, 500 regular contacts around the country, and visit about 100 of them each month. on the basis of those visits, they compile a comprehensive picture of trends in demand, output, labour markets, costs and prices. this is used alongside the standard analysis of the usual macroeconomic time series in forming our assessment of the economy. this material was influential, for example, in us forming the view that the economy was encountering capacity constraints in some areas over recent years. one would expect that to have been the case anyway after many years of pretty robust growth, but we did not base our assessment on that alone. we based it also on the fact that an increasing number of businesses were telling us that constraints were appearing, especially, but not only, in the labour market. this is just one example where being able to complement the dry statistical analysis by talking to firms has been very helpful. decision - making i turn now to the more important, and altogether more subtle, process of actually coming to a policy decision, and the way in which the decision is understood in the community. over the past decade or more, we have come a long way. the inflation targeting model is pretty well understood. the community understands that our goal is inflation control, and that low interest rates can only exist with low inflation. thoughtful people also understand that the way to keep inflation and interest rates low on average is to be prepared to put rates up modestly, but promptly, when inflation pressures start to increase. generally speaking, financial markets and

history suggests that this effect is likely to be limited and evolutionary. while the stock of foreign exchange reserves held by industrial countries has increased over time, those increases have not kept pace with the dramatic increases in foreign exchange trading or gross financial flows. thus, in a relative sense, the effective stock of foreign exchange reserves held by industrial countries has actually declined. in recent years volatility in global capital markets has put increasing pressure on emerging market economies and this has important implications for financial management in those economies. there have been considerable fluctuations in the willingness of global investors to hold claims on these economies over the last two years. between 1992 and 1997, yields on a broad range of emerging market debt instruments fell relative to those on comparable debt instruments issued by industrial country governments. but this pattern reversed sharply with the onset of the asian financial crisis in the second half of 1997, and again following the ruble ’ s devaluation in august of 1998. these changes in foreign investor ’ s willingness to hold claims on emerging market economies had a particularly severe impact on currencies operating under fixed or pegged exchange rate regimes. accordingly, those countries foreign exchange reserves, and reserve policy, played an important role in the recent financial crises. in both thailand and korea the monetary authorities allowed their foreign exchange reserves, net of forward contracts and other obligations, to fall almost to zero. once this became obvious to market participants, subsequent downward pressure on the baht and the won intensified substantially. in contrast, a number of countries ( taiwan and singapore, for example ) introduced greater exchange rate flexibility without exhausting their foreign exchange reserves. these countries did not suffer the same violent downdrafts in their foreign exchange markets. in recent years hong kong and china have all accumulated substantial stocks of foreign exchange. while the motives for these buildups were not all economic, they may have helped these economies to weather recent financial turbulence at less cost than other emerging market economies in the region. the asian crisis has focused attention on the adequacy of information about official reserves. in thailand and korea, in particular, limited disclosure of these data by the authorities contributed to misperceptions by market participants of resources available to the authorities to maintain the prevailing exchange rate regime. moreover, once the crisis broke, inadequate data undermined efforts by the international financial community to resolve the situation. in response, the g - 10 central banks initiated an effort to establish standards for disclosure of on - and off - balance - sheet foreign currency activities of the