australian economy overall is doing well. we expect that the economy will continue to grow at a solid pace over the next couple of years, with growth picking up to an above - trend rate towards the end of this period. this will be accompanied by further increases in jobs and falls in unemployment. with the economy now having grown more or less without interruption for about 20 years, it is understandable that spare capacity is limited. this means that the economy cannot grow much above its potential rate without causing a rise in inflation. with a large amount of money continuing to flow into the country over the next couple of years as a result of the resources boom, the challenge will be to manage the economy in a way that keeps economic growth on a sustainable path, with inflation contained. this is what the bank is trying to do. at present, inflation is broadly in the middle of the target range ( graph 19 ). over the medium term, though, as growth of the economy picks up, the pressures on inflation are more likely to be upward than downward. this is reflected in the forecasts the bank recently published, which see inflation tending to rise after a period of near - term stability. graph 19 for this reason, the board of the reserve bank decided at its meeting earlier this month that it would be prudent to make an early, modest tightening to guard against such an outcome. this is consistent with the forward - looking approach to monetary policy that the bank has been following for close to 20 years now, and which on balance has helped to keep the economy on a sustainable path.

know, our economy recovered relatively quickly from what was a shallow downturn following the global financial crisis, and over the past year has grown around its trend rate of 3¼ per cent ( graph 14 ). graph 14 domestic demand has grown substantially faster than this – about 5¼ per cent – due importantly to growth in public spending, though this is moderating now. consumer spending has grown by a little below trend over the past year. it seems that even though consumer confidence is high, consumers remain cautious in their spending. the household saving ratio has picked up noticeably from the low levels it fell to earlier this decade. as we have said before, a period of consolidation by australian households, after 10 – 15 years of fairly robust increases in spending and gearing, is probably no bad thing. investment in new dwellings has increased over the past year, though growth in the number of dwellings is still falling short of growth of the population. as a result, rental markets are tightening, with vacancy rates falling and rents rising at a solid pace. at the same time, however, households now seem to be less inclined to increase their gearing in order to trade up to better housing. auction clearance rates have fallen back to around long - run average levels and house prices have been relatively flat over recent months ( graph 15 ). this is in keeping with the more financially conservative approach that australian households have taken recently. these trends are probably most pronounced here in perth, which is going through a period of adjustment after the euphoria of 2006 and 2007. graph 15 business conditions are generally around average levels, although there are clear differences across sectors. business investment is at a high level, particularly in the mining sector, and information published by the australian bureau of statistics, as well as our own liaison with companies, suggest that it will pick up sharply further over the next couple of years ( graph 16 ). in this regard, i would like to acknowledge the vital role played by our office here in perth, led by virginia christie, in helping us understand what is going on in the mining industry. and, of course, i would like to thank those many businesses that regularly make time available to talk to virginia and her team. graph 16 one segment of business investment that remains weak, however, is non - residential building. following large increases in gearing and commercial property prices in 2006 and 2007, the commercial property market has since deleveraged and prices have fallen. the bulk of that adjustment is probably now over,