have also declined significantly. while this partly reflects the winding down of a process of rapid reintermediation that had been occurring as businesses turned to their banks and away from capital markets around the turn of the year, total business funding has slowed. in short, things are happening that suggest a moderation in growth in domestic demand is occurring, signs of which were beginning to appear in the national accounts data released last week. at this stage, inevitably, the extent and likely duration of the moderation remains uncertain. there is not much uncertainty, though, about the need for a moderation. inflation increased over 2007, and in underlying terms reached the highest rate for 15 years or more. it is true that it was boosted by the international rise in oil and other commodity prices, but australia ’ s inflation rate has risen more than most of those in our usual peer group when measured on a comparable basis. it is also pretty clear that strong domestic factors were at work, with growth in local demand at a pace exceeding, by a large margin, any plausible estimate of the economy ’ s long - run potential growth rate for output, at a time when capacity was already tight. had not the rise in the exchange rate occurred over the past couple of years, moreover, the australian dollar prices of energy and other raw materials ( as well as other tradeable goods and services ) would be even higher. so inflation has picked up, and needs, over time, to be reduced. reductions of inflation usually require a period of slower demand growth, and this episode is no different. at the same time as we are seeking this moderation in domestic spending, the rise in resource prices that is occurring courtesy of strong demand abroad has complex effects on the australian economy. since australians pay world prices for their petroleum products, the rising global oil price adds to costs for businesses and consumers. this is inflationary in its immediate impact, though it also acts as a brake on spending on other goods and services, unless people are prepared to reduce saving or borrow to sustain that other spending at previous levels. other things equal, this brake dampens inflation impulses in those other areas. terms of trade - selected countries percentage change, 2002 - 2007 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ chile russia * australia forecast for q3 2008 norway argentina canada south africa mexico turkey indonesia united kingdom france -

conditions of easier funding and help the ability of the financial sector to extend credit. but it can ’ t, for example, add to the supply of land zoned for housing, or improve the responsiveness of the construction sector to demand for additional housing stock. other policies have to do that – and it ’ s important that they do if we are to see easy credit result in more dwellings as opposed to just higher prices for the existing dwellings. monetary policy can ’ t create the additional infrastructure that most people agree we need. funding conditions are not, in fact, an impediment to infrastructure. the real issues are governance, risk - sharing and pricing – areas where other policies have to be right. monetary policy can ’ t directly cause the innovation and technological change that is so important for bis central bankers ’ speeches wellbeing of our citizens over time. other policy areas have to be right – and then the innovators and their backers have to be willing take the necessary risk. as for things that monetary policy should try to avoid, we are also cognisant of the fact that monetary policy does work initially by affecting financial risk - taking behaviour. in our efforts to stimulate growth in the real economy, we don ’ t want to foster too much build - up of risk in the financial sector, such that people are over - extended. that could leave the economy exposed to nasty shocks in the future. the more prudent approach is to try to avoid, so far as we can, that particular boom - bust cycle. it is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that. conclusion the future has no shortage of challenges, but that is hardly new. sensible policies in many areas are needed to help with the required adjustments. that includes monetary policy, within the limits of its powers. a very accommodative interest rate structure, and a degree of stability and predictability, has been in place for some time now. indeed the conduct of policy could perhaps be described as boring. if so, i would regard that as a small success. while the financial markets like to think about almost nothing else than what will happen to interest rates next month, i suspect most people are happy not to have to think about such things, and prefer focusing on issues of more enduring importance for their business or their