still learning how households respond to higher debt levels and lower nominal income growth. inflation targeting in a low inflation environment i would now like to turn to a third issue where there is some commonality of experience : that is dealing with an extended period of low inflation. for a few years now, both countries have experienced low rates of inflation ( graph 9 ). many of the same factors have been at play. wage growth has been subdued given the ongoing slack in the labour market. we have both also seen downward pressure on retail prices from intensified competition. in its latest monetary policy report, the bank of canada noted that this was one issue affecting food prices. the same is true in australia, but the experience here is broader, with new entrants, including overseas retailers, putting downward pressure on the prices of a wide range of goods. 10 / 12 bis central bankers'speeches we are both expecting inflation to increase, but only gradually so. in our case, we expect the disinflationary effects of the earlier decline in commodity prices and the competitive pressures in retailing to wane. some pick - up in wages growth is also expected, although wage increases are likely to remain below average for some time yet. our liaison with businesses does not suggest that a pick - up in wage growth is imminent, but nor does it suggest that a further slowing is in prospect. over recent times, both central banks have had to think about the implications for their monetary policy frameworks of sustained low inflation and rapid increases in borrowing and housing prices. both have recently reaffirmed that inflation targeting remains the right monetary policy framework1. we have also emphasised that our inflation targets are flexible, not rigid straightjackets. in our case, the emphasis is very much on medium - term outcomes, rather than the outcome over any particular period. while there are some differences in emphasis in language, there is a high degree of commonality in our approaches. governor poloz has said on a number of occasions that the bank of canada takes a ‘ risk management approach ’ to monetary policy2. this strikes a very strong resonance with us at the reserve bank of australia. at any point in time there are quite a few possible paths that the cash rate could follow to achieve australia ’ s inflation target, which is to achieve an average rate of inflation over time of 2 point something. consistent with the reserve bank act, we set out to choose the path that, in our judgement, best promotes the welfare of the australian

fixed income markets globally, and most easily in us treasuries, there is little in the way of term premia ( that is, return for holding duration ). there also appears to be very little uncertainty priced in about the movement in short term interest rates. at the end of last year, the term premia had started to rise, separate from any increased uncertainty about short rates, this separation was a good thing. but those premia have now fallen right back. my concern is that both of these will rise in concert, exacerbating the disruptiveness of the sell - off. in thinking about the magnitude and nature of any sell off, an important question to think about is who will take the other side of the trade? how far do prices need to go before someone is willing to take the position? those questions are always relevant but the answers may be different this time around. i will now turn to look at some pricing developments in the foreign exchange market where as i mentioned earlier, there has been some return to more normal levels of volatility in recent weeks. fx the main development in foreign exchange markets in recent months is that the us dollar has appreciated. this has been a long - awaited event by many market participants, including ourselves. a sizeable number of macro funds had lost a fair amount of money over the past bis central bankers ’ speeches year waiting for this event to happen. 1 why the us dollar stayed at its low levels for as long as it did, and why it finally started to appreciate when it did, has baffled many in the market. as keynes famously said, ‘ the market can stay irrational longer than you can stay solvent ’. a few well - known hedge funds came close to proving that proposition over the course of this year. the appreciation of the us dollar was not associated with any noticeable change in interest rate expectations in the us, and, in the case of the aud / usd exchange rate, there was no material change in australian interest rate expectations either. while the us dollar has appreciated, on a trade - weighted basis it is still not that far above its all - time lows reached in 2011. it has only appreciated by 4 per cent in the past few months, which is a small move in the history of swings in foreign exchange rates, where movements of up to 40 per cent have occurred. similarly, while the euro has depreciated in recent months, on a trade - weighted basis the euro is not