slowing in unit labour costs during the downturn and the easing of these other capacity pressures saw inflation moderate significantly. but looking beyond this recent cycle, the past 20 years carry a broader and more important lesson. and that is the economy works better with low and stable inflation, and that the monetary policy framework matters. in the 1970s and 1980s we saw the consequences of high inflation rates. inflation eroded the value of people ’ s hard - earned savings. it made long - term planning difficult. it added to uncertainty. it distorted investment decisions. and as the late 1980s showed it made leveraged asset purchases an easier path to wealth than hard work. the end result was slower growth and greater economic volatility. high inflation also meant high interest rates. in the 1980s, the inflation rate averaged 8 per cent, and the mortgage rate averaged 13 per cent and peaked at 17 per cent. in contrast, since 1993 inflation has averaged just a little above 2½ per cent and the mortgage rate has averaged 7½ per cent. and the volatility of both inflation and interest rates has also been lower under the inflation targeting regime. the clear lesson here is that changes in the average inflation rate ultimately lead to changes in average interest rates, including those on mortgages. today, most people take low inflation as a given, as a permanent part of our economic landscape. inflation expectations are well anchored and the possibility of a rapid increase in the general price level is not something that most people worry about. this is how it should be. there are enough uncertainties in today ’ s world, without adding uncertainty about the average rate of inflation to the list. for all these reasons, there is broad community acceptance that the main contribution that the reserve bank can make to strong sustainable growth in the australian economy is to bis central bankers ’ speeches maintain low and stable inflation. in concrete terms, our objective is to keep the average rate of inflation over time somewhere between 2 and 3 per cent. we have achieved this over the past two decades, and this has been one of the key building blocks for australia ’ s strong economic performance. importantly, we have had from the start a flexible inflation targeting regime focusing on medium - term outcomes, which is what ultimately matters to both households and businesses. under this framework, inflation has been both below, and above, the 2 – 3 per cent range. the framework allows us to respond to one - off events and to large changes in world relative prices in a way that promotes economic stability and

low as three basis points in early 1999 and has since decreased to between one and two basis point. this success has been sustained in particular by the high degree of integration of the largevalue payment systems and our target system. the launch of our new single technical platform, london economics ( 2002 ), “ quantification of the macroeconomic impact of integration of eu financial markets ”, report to the european commission. see “ the role of financial markets and innovation for productivity and growth in europe ”, ecb occasional paper no 55, forthcoming. see the bis quarterly review, march 2007, table 21b. the data underlying the, at present, 42 indicators are published and updated twice per year on the ecb ’ s website. see at http : / / www. ecb. int / stats / finint / html / index. en. html. target2, in november this year will promote further financial integration, in particular through a harmonised service level, a single price structure, and a harmonised set of cash settlement services. it is, however, also a fact that the euro area short - term debt securities market has witnessed only a limited degree of cross - border activity. this may partly be due to the fact that short - term debt securities issued by euro area residents have very similar risk characteristics and therefore offer little scope for international diversification. our respective indicator, which gives the share of short - term debt securities issued by euro area residents and held by other euro area residents, shows a rising trend – from 7 % in 2001 to over 12 % in 2005 – but the absolute numbers are small when compared to the corresponding indicators for the bond and equity market. with respect to the absolute size of the short - term debt securities market, i would like to emphasise the short - term european paper ( step ) initiative. the step initiative promotes the development of a pan - european short - term paper market through market players ’ voluntary compliance with a core set of standards encompassed in the step market convention, which was signed in june 2006. by the end of march this year, 35 step - compliant programmes, amounting to €201 billion, had been launched under the step label. the ecb regularly produces statistics on yields and volumes in the step market and publishes them on its website. 7 with respect to bond markets, euro area cross - border holdings of long - term debt securities have increased strongly – from about 10 % at the end of the 1990s to nearly 60 % in