indicators have suggested that the economy has been slowing, after a period of excessively strong growth in demand that had pushed up inflation. absent the sudden recent deterioration in the global outlook, i think we would in due course have looked back and seen that the slowing had been similar to that observed in 2001, albeit with differences by sector. but with recent international economic and financial events, the economy will probably now experience a more significant slowing than was otherwise going to occur. that is barely detectable yet in some of the key official datasets. employment, for example, remained quite solid, and unemployment very low, through into october, consistent with the gradually moderating growth of mid year, but not yet showing the effects of the more cautious mood in the business community that is now taking effect. nonetheless, in the period just ahead, we are likely to see, for a time, growth at quite a slow pace. that is the outlook embodied in the reserve bank ’ s statement on monetary policy released last week. this means that, over time, the extent of capacity utilisation will decline and pressure on prices will abate, though that could take some time to be apparent. the lower exchange rate will tend to push up prices for traded goods, though the weak global environment may mean this effect could be muted somewhat. lower raw material prices will also be of considerable assistance in slowing manufactured prices – again subject to the exchange rate. of course, many of the items pushing up inflation in australia of late have been in the services sector, but the likely moderating trend in labour cost growth over the next couple of years should help here. overall, our view is that after a fairly extended period of above - target inflation, we will see the cpi inflation rate moving back to its target over the next two to three years. should demand in the economy weaken further than we expect, that would be likely to be accompanied by a downward revision to the inflation outlook. given this outlook, the reserve bank has been lowering the cash rate. we have chosen to do so quite quickly, well before a decline in inflation is evident in the data, in recognition that the international circumstances had changed quite sharply, which have increased the risk of a more abrupt slowing in demand. that is, we have been pursuing the inflation target in a forward - looking way, and paying due account to economic activity considerations. in the period ahead, we shall be seeking to strike the right balance between, on the one hand, the need to

have taken, equity stakes in key financial institutions, up to and including full nationalisation in some cases. as far as confidence is concerned, measures have been taken by a number of governments to secure retail deposits by a guarantee, and to offer a guarantee of eligible wholesale obligations of banks willing to pay for it. this ought to alleviate concerns about riskiness of the institutions concerned, allowing them access to term funding. these measures are bearing some fruit. markets are beginning to thaw. spreads between expected central bank policy rates and term funding costs have come in from the extraordinary levels seen in september and october, though they remain high by historical standards. the actions taken to inject equity are stabilising a situation on solvency that could otherwise have unravelled quickly. there have been substantial issues of wholesale securities using the priced guarantee, mainly by uk banks, suggesting that term markets are opening again. what is needed now is for policy - makers everywhere to specify as quickly as possible the parameters of their various guarantees so that market participants have a degree of certainty about how things will work – while retaining, within reason, the capacity to adjust the parameters in the light of experience. so a good deal has been done already towards addressing the financial problems themselves. these measures cannot avert a significant slowing in the global economy – it is fairly clear that a recession in the major country group, the g7, is under way. that, in turn, means that credit losses will be incurred by the lenders in those countries as typically happens in a business cycle downturn. but the measures averted, in my judgment, potential systemic collapses that would have had massive repercussions throughout the world. that leaves an international business cycle event to be addressed. so what are the ingredients for doing that? the slower growth in demand occurring now, and likely to be seen over the coming year, has had the effect of lowering the most flexible set of prices, namely those for raw materials and energy. the price of crude oil has fallen, measured in us dollars, from nearly us $ 150 a barrel at mid year to under us $ 60 today. prices for metals and soft commodities have also declined considerably. it now looks as though prices for iron ore and coal, critical cost components for steel and electricity, are declining too. other prices around the global economy are typically slower to respond to the shifting balance between demand and potential supply, but with global output expected by the imf to be growing during 2009 at its slow