turning now to the australian labour market, the unemployment rate, at 5. 2 per cent, is a little higher than when we met six months ago. this is despite employment growth having been stronger than we had expected. what has happened is that increased demand for labour has been met with more labour supply, especially by women and older australians. reflecting this, a higher share of the australian adult population is participating in the labour market than ever before. this is good news. but one side - effect of this flexibility of labour supply is that it is harder to generate a tight labour market and so, in turn, it is harder to generate a material lift in aggregate wages growth. looking forward, while some slowing in employment growth is expected, the central scenario is for the unemployment rate to move lower to reach 5 per cent again in 2021. if things evolve in line 1 / 4 bis central bankers'speeches with this central scenario, it is probable that we will still have spare capacity in the labour market for a while yet, especially taking into account underemployment. this means that the upward pressure on wages growth over the next couple of years is likely to be only quite modest, and less than we were earlier expecting. caps on wages growth in public sectors right across the country are another factor contributing to the subdued wage outcomes. at the aggregate level, my view is that a further pick - up in wages growth is both affordable and desirable. turning now to inflation, the june quarter outcome was broadly in line with expectations, after a run of lower - than - expected numbers in earlier quarters. over the year to june, inflation was 1. 6 per cent, in both headline and underlying terms, extending the period over which inflation has been below the 2 – 3 per cent medium - term target range. the reserve bank board remains committed to having inflation return to this range, but it is taking longer than earlier expected. there are a few factors that i would highlight as contributing to the low inflation outcome over the past year. these are : the slow growth in wages ; the ongoing spare capacity in the economy ; various government initiatives to address cost - of - living pressures on households ; and the adjustment in the housing market, which has contributed to unusually low increases in rents and declines in the price of building a new home in some cities. working in the other direction, the drought and the depreciation of the exchange rate have been pushing some prices up. looking ahead, inflation is still expected to pick

ian macfarlane : economic developments at home and abroad speech by mr i j macfarlane, governor of the reserve bank of australia, to the joint australian business economists and economic society ( new south wales branch ), sydney, 10 july 2001. * * * it is a pleasure to be here again talking to the australian business economists and the economic society. on occasions like this, i often feel it would be nice to be able to speak in a detached way on some interesting public policy or historical topic. but in periods where the domestic and world economies are evolving quite quickly, current economic developments keep pushing their way to the front. so i will have to save my more scholarly piece for another day, and confine my remarks tonight to some observations on recent economic events here and abroad. i would like to take as my starting point the way we viewed the economic outlook for australia about a year ago, that is, as we were entering the 2000 / 01 financial year. at that time, there were two main components to our view of the economic outlook. the first was a view on the medium - term cyclical development of the economy, which was predominantly optimistic. the second was a view about the effect of " once - off " events such as the introduction of the gst and the sydney olympics on the financial year 2000 / 01 ; here, the tone was one of uncertainty. i would now like to spell out how these two overlapping views have fared in the light of unfolding developments. 1. the medium - term cyclical outlook for some years now, we have pointed to the prospect of achieving a longer economic expansion if the economy can be managed in a way which avoids the type of imbalances that have brought about our downfall in the past. by the middle of last year, we were able to point out that it had already happened, in that the present expansion was already longer than its predecessors. but we were saying more than this – we were saying that, even though it was longer, it still had not shown any of the imbalances that characterised the latter stages of earlier expansions : · although inflation of goods and services prices had risen, it was not by enough to threaten our medium - term objective ; · asset price inflation of either shares or property had not become a problem ; · wages growth remained moderate ; · there had not been excessive physical investment with its attendant risk of over - capacity ; and · the current account deficit was not high by the standards of the past