demand, we thought that commodity prices and, therefore, australia ’ s terms of trade would decline ( but remain higher than their preboom levels ). that would normally be associated with a depreciation of the australian dollar. we anticipated that demand in the non - mining sectors would pick up and that labour and capital would be drawn back to that part of the economy. any depreciation of the nominal exchange rate would facilitate that transition by improving the competitiveness of the ‘ other tradable ’ sector. the movement of labour would also be facilitated by some decline in wage growth, as the labour shed by companies that had undertaken the mining investment looked to move back into the nonmining sectors. in other words, we thought that the requisite real exchange rate depreciation would occur largely via the nominal exchange rate, but might also be assisted by a decline in domestic cost pressures. these developments were expected, at least in part, to reverse some of the effects on consumer price inflation seen during the investment phase of the boom. in particular, a gradual depreciation of the exchange rate would put upward pressure on tradable inflation for a time, while a reduction in wage growth and domestic costs more generally would put downward pressure on nontradable inflation. these opposing effects could potentially result in little net change to overall inflation, but given that inflation had been above average during the boom, it would not be surprising to see inflation below average after the boom. but having made some predictions about the direction of some key variables, we also noted the considerable degree of uncertainty, including that related to the global economic outlook. after the boom – what actually happened? many of our predictions have been borne out. mining investment declined significantly and resource exports grew strongly. mining investment has further to fall, although the largest drag on gdp growth from that source is likely to have come and gone over the financial year just passed. the decline in mining investment from 2012 led to lower growth in overall mining activity ( mining investment plus resource exports ; graph 2 ). more recently, growth of mining activity has picked up. mining activity is set to continue to grow for a time as the drag from mining investment wanes and production of liquefied natural gas continues to ramp up. 3 / 16 bis central banker's speeches as had been anticipated, mining - related employment has contracted and wage growth in those industries has declined to be noticeably below that of other sectors. 6 in the non - mining sector, growth in activity

of the advanced economies are currently operating well below full capacity and, given the subdued nature of the recovery, it is likely to be some time before this excess capacity is wound back. one consequence is that, provided inflation expectations remain well anchored, official interest rates in these economies – which are currently at historically low levels – are likely to remain below average for a considerable period of time ( graph 5 ). in contrast, elsewhere, including in asia and australia where growth is stronger, interest rates are likely to be relatively higher. this interest differential is likely to lead to a flow of capital from the major advanced economies to asia and other better - performing areas of the world. graph 5 g7 – average policy rate % % sources : federal reserve bank of new york ; global financial data ; thomson reuters in asia, concerns are already emerging about the implications of this. in particular, some countries are worried about the potential for volatile capital flows to be destabilising for their economies. the concern is that capital inflows in the near term will later turn into capital outflows when interest rates in the advanced economies do eventually normalise, and that this could be disruptive. as a way of insuring themselves against this risk, some central banks continue to accumulate foreign reserves. a number of countries in the region are also concerned about the effects of capital inflows on their domestic banking systems, with some having taken steps to rein in bank lending growth, particularly in cases where property prices are increasing strongly. a related consideration is the effect of these capital flows on exchange rates in the region. in general, there is considerably less tolerance for large movements in exchange rates in many of these countries than there is in australia. in our own case, movements in the value of the australian dollar are largely seen to be a stabilising force for the economy. there is also a general acceptance of the view that, over the next few years, our real exchange rate is likely to be higher than the average over the past decade or so. in contrast, in much of asia, where international trade shares are considerably higher than in australia, movements in exchange rates tend to be viewed with more concern, particularly when they are seen to be driven by speculative capital flows. one other related consideration is the impact on asset markets around the world of an extended period of low official interest rates in the major advanced economies. when the global economy was in this situation around five years ago things did not work out well. while the current