programmes ; by demographic trends which are beyond the control of policy makers, especially population ageing ; and by the implementation of acquis - related obligations. i dwell at some length on this issue because the state of public finances is currently the only significant impediment to malta ’ s membership of the euro area. while it is encouraging to know that we have been able to reduce the fiscal deficit / gdp ratio from 11 % in 1998 to its current level of around 6 %, getting to the maastricht reference value of 3 % by 2006, as the government plans to do, will require unrelenting efforts and a greater emphasis on expenditure - cutting. this is not only because taxation levels are already relatively high for an economic downturn, but also because of the tradeoffs involved in pursuing further fiscal consolidation. indeed, the government ’ s resolve to trim the deficit will be a key determinant of the degree of exchange rate stability that it will be possible to achieve during erm ii. this, in turn, will depend on how much economic operators, taxpayers and recipients of social benefits and other transfer payments are prepared to give up today in exchange for sustainable public finances tomorrow. in the final analysis, therefore, the success of the euro strategy will hinge on consensus being reached on the implementation of the necessary reforms. in this context, discussions are underway in the malta council for economic and social development with a view to reforming the pension and health systems, currently two major sources of pressure on public finances. if the social partners do indeed take ownership of the reforms, the credibility of the country ’ s overall economic strategy will be considerably enhanced. agreement on the reforms is also important because in an erm ii context the room for manoeuvre available to central banks is restricted. the implied commitment to a high degree of exchange rate stability - and for countries like malta which have experienced limited day - to - day exchange rate movements, the concept of stability has taken on a very specific meaning - means that monetary policy cannot be used for demand management purposes. the onus of adjustment must then fall on fiscal and structural policies. the implementation of effective policies must also be ensured because the financial markets will be quick to spot any incoherence between a country ’ s exchange rate and its underlying economic condition. since market behaviour, however, also has the potential to produce volatility to a degree unwarranted by the economic fundamentals, the exchange rate stability assessment at the end of the

but for the reasons i have spoken about today, this increase is likely to be only gradual. given this, there is not a strong case for a near - term adjustment in monetary policy. with things moving in the right direction, the board's view is that by holding rates steady, we can help promote a sense of stability and confidence. we hope that this helps australians make the decisions that can help build the future prosperity of the country that we are so fortunate to live in. thank you for listening. i am happy to answer your questions. endnotes [ * ] i would like to thank andrea brischetto and geoff weir ( a visiting scholar to the reserve bank ) for assistance in the preparation of this talk. andrews d, c criscuolo and p gal ( 2015 ), ‘ frontier firms, technology diffusion and public policy : micro evidence from oecd countries ’, oecd productivity working papers no 2. available at < https : / / www. oecd. org / eco / growth / frontier - firms - technology - diffusion - and - public - policy - micro - evidence - fromoecd - countries. pdf >. productivity commission ( 2017 ), ‘ shifting the dial : 5 year productivity review ’, report no. 84, august. available at < https : / / www. pc. gov. au / inquiries / completed / productivity - review / report / productivity - review. pdf >. © reserve bank of australia, 2001 – 2018. all rights reserved. http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 06 - 13. html 14 / 15 13 / 06 / 2018 productivity, wages and prosperity | speeches | rba http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 06 - 13. html 15 / 15