in the short - to medium - term zone – will decline accordingly. or if a central bank ’ s asset purchases are received as a signal that a central bank ’ s future policy stance has changed – for example, a central bank takes more aggressive policy responses in the face of developments in economic activity and prices, or there is an adjustment in the policy goal – the forecasted path of short - term interest rates will decline, and longer - term interest rates – mainly in the short - to medium - term zone – will decline accordingly. both of these effects encourage a decline in longer - term interest rates. what is more important, however, is whether such a decline leads to an improvement in a wider range of financial conditions and, through an increase in spending, eventually stimulates economic activity and prices. if such transmission mechanism is forecasted to work, then it will put upward pressure on long - term interest rates in terms of both effects. let me elaborate on this point. as one effect of a decline in longer - term interest rates due to government bond purchases, it is expected that confidence will improve among investors, firms, and households, thereby encouraging a shift of investment from government bonds and other safe assets to a wider range of risk assets, such as corporate bonds, equities, and overseas assets, and this in turn will lower risk premiums of these assets and increase asset prices. this can be considered a portfolio balance effect in a broad sense and means an improvement in wide - ranging financial conditions. in such a situation, demand for government bonds will decline and there will be a certain amount of upward pressure on term premiums of government bonds ( that is, a rise in the extra interest rate required for risk associated with long - term bond investment ). in addition, if spending is forecasted to increase with a longer and variable time lag, thereby stimulating economic activity and prices, it will shift upward the forecast path of short - term interest rates, steepen the yield curve, and put upward pressure on long - term interest rates ( that is, a rise in the forecast of future short - term interest rates ). while encouraging a decline in longer - term interest rates on one hand and expecting a rise in long - term interest rates in the longer run on the other hand seems contradictory at first glance, in fact it is nothing of the kind. then, how should we understand the fact that long - term interest rates in advanced countries have been hovering at historic low levels? it seems

##ity facility, unless they have paid the 15 basis points commitment fee for the clf. in this way, any es balances acquired from the bank ’ s liquidity facility will always represent the exchange of one liquid asset for another and cannot improve an adi ’ s compliance with the liquidity standard. the consequence of this is that small “ drawings ” on the clf will be a routine event as part of normal operations to manage payment flows. provided the funds are repaid same - day or, in the case of open repos, are retained in the adi ’ s es account, there need be no cost to using the facility in this way. however, should the funds be used for any other purpose such that the balance on the account is below where it should be, the penalty will be 25 basis points above the cash rate target. such a use of the clf is likely to occur in more stressed circumstances. as i mentioned earlier, 25 basis points has long been the penalty rate attached to the bank ’ s liquidity facility and it is designed to discourage adis from relying upon the facility for funding purposes during normal times. in a stress scenario, of course, this penalty rate of 25 basis points may not appear so onerous. that is by design. in such circumstances, it is appropriate that the central bank provides liquidity support against suitable collateral. this principle of central banking dates back at least to bagehot : lend against good collateral at a penalty rate but not a penal rate. the experience here in australia over many years is that this penalty of 25 basis points has been sufficient to ensure that there has not been excessive use of the central bank ’ s liquidity facility. the usage of this facility is published on the website with a small lag and recorded in the bank ’ s annual reports in the chapter on operations in financial markets. even in the stressed environment of 2008 and 2009, the facility was only drawn on a couple of times for small amounts, and for no longer than one day, to deal with unexpected payment flows. technical details of the clf and its relationship to the reserve bank ’ s existing liquidity facility can be found on the bank ’ s website. bis central bankers ’ speeches to put the rationale for the clf another way, the purpose of holding liquid assets is to sell them during periods of stress. in the australian context, this will mean using funds raised via the clf. this need not be the “ last resort ” ; that