of oil. the evidence thus far is that demand has slowed a little, but supply has increased rapidly in recent years and is expected to remain at a high level this year. this matters because, usually, more supply of something and a cheaper price is good news, not bad. to be sure, lower oil prices require adjustment on the part of producers – corporate and sovereign. but this has always been so and an increase in the availability of energy and cheaper prices has generally, in the past, been seen as a plus for overall global growth – a positive ‘ shock ’. this was because the response of consumers of oil to a decline in its price was to consume more – not just more oil but other goods and services as well, using the higher real income afforded by lower oil prices. it was thought that this outweighed the negative effects of spending cutbacks in oil - producing countries. it seems people are less confident this time of a fall in oil prices being expansionary. why so? the fact that the united states has become a larger oil producer ( and a significant producer of the short - run ‘ marginal barrel ’ ) is clearly relevant. so is the possibility that consumers both there and in europe may, for particular reasons, be more inclined to save any windfall from lower oil prices than they used to be. these factors may, for a time, work against the traditional positive effect. in addition, the price for oil was high enough, for long enough, that many investment and spending decisions were taken around the world that look, perhaps, not quite so sound in hindsight. hence, producer countries have budget strains ; some sovereign wealth funds are liquidating financial assets ; spreads on debt instruments issued by energy companies have widened sharply ; exploration and new investment is being curtailed rapidly. it seems as though the sheer strength and longevity of the preceding period of very high oil prices prompted behaviour that made some players more vulnerable to a price decline. that, of course, is not unknown in the history of commodity markets. having said all that, people might be being a little too pessimistic about the effects of the fall in oil prices. it is still equivalent to a reduction in taxes for a very large number of consumers around the world who now have more disposable income to spend or to repay debt. the shareholders and state owners of the producing assets, who gained from the higher prices, are wearing most of the costs of the lower price, along with those who provided

sentiment and in the feedback we were receiving directly from firms. australia was being affected through our trade, financial and business linkages with the rest of the world. australia was doing better than most countries, as had been anticipated. but for a few months it was not clear how much comfort we should take from that, because the economic news from abroad seemed to be so dire. as one metric, the imf ’ s forecasts for global output in 2009 as at last february were for growth of ½ per cent. that was already a marked reduction from a few months earlier. subsequently they were cut further, and when released in late april showed an expected contraction of over 1 per cent, which would be the weakest outcome for at least six decades. forecasts for australia were inevitably marked down as well. the time of our may statement on monetary policy was when the outlook for the local economy seemed weakest. in this environment, the possibility that we would need to ease monetary policy further was obviously canvassed. financial markets expected as much, at one point pricing in a decline in the cash rate to less than 2 per cent. yet the board had already aggressively eased monetary policy, delivering the largest reduction in debt servicing costs to households in modern times. interest rates were low, or in some cases very low, by historical standards. substantial fiscal stimulus was also in train. these could be expected to provide significant support for demand. so even as activity abroad continued to contract, the board had to be mindful of how much action had already been taken in anticipation of serious economic weakness. those measures would take time to have their full effect. but that lag could not be shortened by increasing the dosage. accordingly, while keeping open the option of further easing, the board kept a fairly steady setting through this period. there was one further small decline in the cash rate in april. apart from that, official interest rates have been unchanged since we last met, in contrast to the very sharp falls from september through to february. where then do we stand at present? things abroad hardly look rosy, but they look distinctly better than they did a few months ago. conditions in international financial markets have continued to improve. there have been occasional reversals, but each time the improving trend has resumed. extreme risk aversion has abated ; spreads have narrowed ; capital markets have continued to thaw, though in some overseas cases this has relied heavily on central bank financing activities. financial institutions in the united states and