quite a remarkable achievement compared with the record of the past three decades, but i will return to that subject later. on inflation, in november we forecast that the cpi would rise by 2 % in the year to december 1999 and by 2¾ % in the year to june 2000. we got closer to the mark in these forecasts - the outcome for the year to december 1999 was a little lower, at 1. 8 %, and we now think that the figure for the year to june 2000 will be a little higher, at 3 %. some of the increase in the cpi is due to temporary factors, so that the 3 % for the cpi corresponds to about 2½ % for underlying inflation. thus we have finished the period when inflation was below the bottom of our band - a period that lasted longer than any of us expected - and we have moved back to where the cpi is near the top of our band, but partly due to some temporary factors. where to from now? this will be particularly hard to judge, given that for at least a year the yearended figure for the cpi will be obscured by the once - off lift due to the gst, and then the effects of the abolition of wholesale sales tax. at present, we feel that the most likely outcome for inflation once all the dust has settled - i. e. once we are well into 2001 / 02 - is that it will be in the 2 - 3 % target range, probably in the upper half. as usual, there is a large margin of uncertainty attached to that forecast, but the adjustments to monetary policy which have been made over the past six months give us more confidence that inflation should be contained. i would now like to move away from the short term and turn to the medium term. most developments in monetary policy can only be understood fully in this context although, by necessity, most commentary concerns short periods such as month to month, in line with our board meeting, or even shorter, such as day to day, reflecting deadlines of the daily press. i will start by restating the logic of the inflation - targeting framework, which is the underpinning of our whole medium - term approach. we have an inflation target that says inflation should average somewhere between 2 and 3 % in the medium to long run. we accept that at times it will be outside this range, but if we think this is going to happen more than briefly it calls for adjustments to monetary policy which will return inflation to the target

the recent oil price increases demonstrate the same principle, on a much smaller scale. rises in a range of raw materials prices, driven mostly by global trends, are also having an impact on the cost of producing goods in australia. in the opposite direction, the subdued world price environment of 1997 and 1998 helped contain any inflationary fallout from the lower exchange rate we experienced during the asian crisis. movements in the exchange rate clearly affect inflation and, as such, are an integral part of any inflation - targeting regime. that is why they are frequently mentioned by central banks which operate monetary policy in this way. but there is no mechanical relationship between the level of the most frequently quoted measure of the exchange rate - the rate against the us dollar - and the future domestic price level. for a start, the price effects are better approximated by the trade - weighted index. second, a temporary movement in the exchange rate may have little or no effect on prices and so some attempt must be made at estimating medium - term developments, or at least market participants ’ expectations of medium - term developments. finally, a change in the exchange rate may have different implications if it primarily represents international views about our economy and policies, or if it is because we are being swept along with other countries in an international adjustment process. all of these factors are relevant and have to be taken into account with due weight. but that is done under the unifying framework of the inflation - targeting approach to policy. as i have noted above, this approach has delivered tangible benefits. i am convinced that it will continue to do so. mr chairman, it is a difficult time to be making monetary policy. the world environment is changing. most of these changes are for the better - our region is in recovery, as opposed to the severe recession of two years ago, and global growth is strong. our terms of trade are improving. some other changes in world capital markets, for example - are rather less benign for australia. adapting to these changing circumstances presents a challenge. at such times, it is important to keep our eye on the main goals - to sustain a long expansion, and to address early potential imbalances which could impede the expansion ’ s continuation. however, we cannot assume that we have a choice of outcomes for the australian economy, in terms of growth and inflation, which is invariant to what happens in the rest of the world. while we are benefiting from the stronger world growth compared with recent years, we will also be