a taylor rule “ represents ” monetary policy, the typical exercise that can answer the normative issue is the following : how would inflation over the medium term horizon react if we were to adjust our policy instruments, one at a time or all of them contemporaneously? this is the philosophy behind our third criterion for declaring a “ sustained adjustment in the path of inflation ”, which is a pre - condition for starting to normalise our purchases and, indirectly, for starting to normalise our policy rates – through the sequencing we expect to follow toward a more normal configuration of policy. conducting this type of exercise today, we see that the combination of instruments that are currently in place, including forward indications about the horizon over which these instruments will still be used, is sufficiently supportive to put inflation on a rising path that will bring it to levels close to 2 % over a time frame that is compatible with our definition of medium term. but, and this is our third criterion for a sustained adjustment, if we were to firm policy by scaling back the stimulus provided, that inflation path would likely stall and relapse. the projected path of inflation remains conditional on very easy financing conditions, for which monetary policy plays a key role. conclusions in conclusion, let me return to the sequencing issue. communication about the intentional horizon of net asset purchases and expected future path of the policy rates is a key component of the policy strategy that started in 2014. the reason is simple and, once more, has to do with instrument complementarity. above and beyond any signalling content they may have on the intention of the central bank to provide accommodation, asset purchases add stimulus principally by squeezing the term premia priced into longer - dated securities. however, absent reassurance that policy rates will remain anchored around their lower bound for the entire life of the net purchases, the impact of asset purchases may be partly neutralised. the downward impact of purchases on long - term interest rates via compression of term premia will be offset by the upward pressure that will stem from the steeper path of the expected short term interest rates. moreover, absent reassurance on the rate path, the term premium itself may increase if the future course of the policy rates becomes more uncertain, despite the contrary effect of the purchases. if investors start perceiving that the path of the policy rate is subject to upward uncertainty, the compensation for interest rate risk – i. e. the term premium – will have to increase. again, long - term

policy | speeches | rba graph 2 a third factor contributing to the slowdown in global growth has been a series of country - specific factors, including natural disasters in japan, a new vehicle emissions testing regime in germany and some extreme weather events. so, these are some of the key factors that have been at work. looking forward, the global picture looks a little brighter and it is reasonable to expect that growth will strengthen a little later in the year. the chinese authorities have responded to the slowing in their economy with measures to support economic activity. globally, financial conditions are very accommodative and major central banks have signalled an easier monetary policy stance than was earlier expected. it is also reasonable to expect that the drag on growth from some of the country - specific factors that i mentioned will pass in time. consumption growth in many economies also remains robust, supported by strong employment growth and rising wages. and notably, the weakness in the manufacturing sector has not spilled over in a material way to the services sector. all this means that the global economy appears quite resilient at the moment. the big uncertainty remains trade policy. a resolution of the current disputes would help boost trade flows and reduce some of the uncertainties facing businesses. in that case, we could expect a pickup in investment too. on the other hand, a failure to resolve the disputes represents a major downside risk to the global economy. so there is a lot riding on this issue. https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 05 - 21. html 3 / 16 5 / 21 / 2019 the economic outlook and monetary policy | speeches | rba one other feature of the global economy that i would like to draw your attention to is the coexistence of low unemployment and low inflation. unemployment rates in many of the major economies are the lowest they have been in many decades. at the same time, inflation remains low. while wages growth has picked up, inflation rates are mostly below 2 per cent and below the central banks'targets ( graph 3 ). graph 3 this experience is the opposite to that of the 1970s and early 1980s. during that period, many countries experienced what became known as stagflation : the coexistence of high unemployment and high inflation. today, the picture is very different : we have low unemployment and low inflation. this is obviously a much better configuration. understanding why this has happened is a priority for