will be against the backdrop of a challenging environment. consumer demand is likely to grow at a rate close to that of income. higher wealth and confidence could see the saving rate decline a little, but consumption will not be the same driver of growth that it was before the financial crisis. putting all this together, our expectation is that the below - trend growth in gdp we have seen for a while now will probably continue for a bit longer yet. over the more medium term, there are good grounds to think that growth can strengthen. eventually more capital spending will be required in some of those sectors where it is very low at present. the corporate sector in aggregate has high reserves of cash, financial intermediaries and capital markets are willing to lend, and interest rates are low. if the nascent improvement in “ confidence ” we have seen can be sustained, that will help to achieve better growth. in fact, we could aspire to a period during which growth could be a bit above trend for a while, since spare capacity in the economy has increased a bit over the past eighteen months or so. monetary policy has been playing its part to support demand. because inflation has been consistent with the target, the board has been quite comfortable in easing policy by a significant amount. the cash rate has been reduced twice more since we last met with the committee, and by a total of 225 basis points over the past two years. borrowing rates are at their lowest levels in a long time. the returns to savers for holding safe assets have commensurately declined, and this has clearly prompted substitution towards other assets, including equities and dwellings. the rate of credit growth has remained quite low thus far, though it is now increasing a little, as housing loan approvals have moved up quite noticeably over recent months. low interest rates are doing the sorts of things we expect them to do. this is the way expansionary monetary policy works. the exchange rate has also behaved, of late, more as might be expected in such circumstances : that is, it has declined. from about us $ 1. 03 at the february hearing, it has fallen by about 13 per cent. the bank has described the exchange rate as “ uncomfortably high ”, and suggested that balanced growth in the economy would probably require a lower exchange rate. the board has maintained an open mind about whether we may need to lower interest rates further. at this point, however, there are few serious claims that the cost of borrowing per se is

glenn stevens : the cautious consumer address by mr glenn stevens, governor of the reserve bank of australia, to the anika foundation luncheon, supported by australian business economists and macquarie bank, sydney, 26 july 2011. * * * thank you for coming out once again in support of the anika foundation. 1 i want also to thank in particular macquarie bank and the australian business economists for their continuing support of this annual series. in last year ’ s anika foundation address, i talked about the fiscal difficulties being faced by governments of some of the world ’ s largest countries in the wake of the financial crisis. a theme of that talk was that a number of major advanced economies had been facing for a while the need to address long - term structural issues in their fiscal accounts. in large part these stemmed from the inevitable collision of long - run trends in demographics and entitlements. a deep recession and the prospect of a slow recovery have brought forward the pressure to face these issues. over the past year, we have seen the focus on fiscal sustainability continue to increase. the problems have been most acute in greece, though unfortunately not confined to it. greece is a small country that has nonetheless assumed considerable significance. the citizens of greece are now experiencing an austerity regime of historic proportions, which is a precondition for access to the foreign official funding that will allow them to meet their near - term obligations. but the longer - term solution surely will involve the taxpayers of europe accepting part of the costs of restoring greece to sustainability. the recent agreement appears to be a further step in that direction, with risk being shifted from the private sector onto the european public sector. i would view this as a step on the road to an eventual solution, though european policymakers continue to face a very delicate task in preserving the combination of fiscal sustainability and the single currency. concerns about the us fiscal position have also increased, though this has not been reflected, at this point, in market prices for us debt. the immediate need is for the us authorities to lift the debt ceiling, then for them to work towards longer - term sustainability. in both the us and european cases, the process of allowing things to go right to the brink of a very disruptive event before an agreement is reached on the way forward has been a source of great uncertainty and anxiety around the world. that anxiety has extended to australia, even though, as i am sure people are sick of hearing me say, australia is in the midst of