downward pressure on interest rates for governments, households and businesses, as well as downward pressure on the exchange rate. overall, the bank's package of policy measures has brought about very accommodative financial conditions in australia. the tff has been an important part of this package, and will continue to provide support in the years ahead. financial conditions while bond yields and interest rates remain very low, they have increased over recent months out beyond the shorter end of the yield curve. this is in response to the improved outlook for economic activity and inflation, both here and offshore. sovereign bond yields at the longer end of yield curves rose to around pre - pandemic levels earlier this year, underpinned by a rise in inflation expectations from very low levels to be more in line with central banks'inflation targets ( graph 8 ). graph 8 10 - year government bond yields % % 3. 0 3. 0 2. 5 2. 5 us 2. 0 2. 0 australia 1. 5 1. 5 1. 0 1. 0 0. 5 0. 5 0. 0 0. 0 sources : bloomberg ; yieldbroker the adjustments in financial markets to date are not a cause for concern, however. measures of inflation expectations have returned to levels of a few years ago, when inflation was consistent with, or even below, inflation targets ( graph 9 ). in other words, they don't point to inflation over the coming years sitting above central bank targets in a sustainable way. the increase in nominal yields has been smaller than the increase in expected inflation, which implies that real yields have declined ( graph 10 ). this is beneficial because it means that monetary policy is more stimulatory than otherwise. graph 9 expected and observed inflation % 2. 5 % 2. 5 10 - year inflation compensation * australia 2. 0 us 2. 0 1. 5 1. 5 1. 0 1. 0 germany 0. 5 % 0. 5 % headline consumer price inflation, year - ended - 1 - 1 * spread between the yield on nominal and inflation - protected government bonds sources : bloomberg ; rba ; yieldbroker graph 10 10 - year government bond real yields % % australia us germany - 1 - 2 - 1 - 2 sources : bloomberg ; rba ; yieldbroker the bank's yield target has ensured that the 3 - year ags yield remains around 10 basis points. but 3year yields in other domestic markets rose over the first few months of this

a bit since the start of this year, but there is little sign to date of a sustained improvement in construction activity. weakness in construction has been accompanied by declines in output of a range of manufactured products over the past year. 1 steel is one obvious example. mining activity in china has also been affected. indeed, a further decline in the output of unprofitable chinese mines would provide some support to commodity prices, and would benefit other producers, including in australia. the substantial appreciation of the renminbi over the past year ( 12 per cent in trade weighted terms ) may also have contributed somewhat to the weakness in the industrial sector bis central bankers ’ speeches although the weakness in china ’ s property and manufacturing sectors is clearly of concern to commodity exporters like australia, there are a number of countervailing forces supporting broader activity in china. • first, growth in the services sector has been resilient, and should continue to be assisted by a shift in demand toward services as incomes rise. • second, growth in household consumption has also been stable in recent quarters aided by the growth of new jobs. 2 of course, such outcomes cannot be taken for granted ; if the industrial weakness is sustained, it might eventually affect household incomes and spending. • third, chinese policymakers have responded to lower growth by easing monetary policy and approving additional infrastructure investment projects. they have scope to provide further support if needed, although they may be reticent to do too much if that compromises longer - term goals, such as placing the financial system on a more sustainable footing. there are two key implications of the slowing in china ’ s growth for australia. first, the substantial slowing in industrial production has contributed to a further decline in commodity prices over the course of this year. ( this is in addition to the contribution from the substantial increase in the supply of commodities, including from australia. ) we ’ ve detailed the effect of the decline in commodity prices on australia ’ s economy elsewhere. 3 i would just add that commodity prices remain relatively high. the bank ’ s index of commodity prices has fallen by about 50 per cent from its peak, but is still almost 80 per cent above early 2000 levels. clearly, conditions in the industrial sector in china, and asia more broadly, will have an important influence on the path of commodity prices over the near term. beyond that, the changing nature of china ’ s development implies that the potential for commodity prices to rise from here is somewhat limited. second, the