that rates were raised. i have often stressed that monetary policy has to be set taking into account the average of all the parts of the economy, not to what is happening in one sector. of course, if a sector is overheated, it may push up the average for the economy, and in that way exert a disproportionate influence. it is also true that, historically, borrowing for housing purposes has been one of the more interest - sensitive sectors, and so it may have been more affected than other sectors by the previous low level of interest rates and it may respond more than other sectors to the recent increases. but that does not mean we singled it out. we have also been accused of setting monetary policy in relation to the sydney and melbourne housing markets, and ignoring the rest of the country. this clearly cannot be true in the case of the recent tightenings, as house prices in sydney and melbourne are growing less quickly than in other states ; in fact, housing prices in some parts of these cities are already falling. in australia we have conducted monetary policy by using an inflation - targeting regime for about a decade now. it has been a very successful regime in that it has delivered ( along with various other reforms ) the longest period of uninterrupted good economic growth in the post war period, at a rate exceeding that of all other significant developed economies. it has concentrated our minds at the reserve bank in that we have been very conscious of our need to deliver the results to which we have committed. over the 10 - year period, inflation has averaged 2. 4 per cent. by acting early on monetary policy to keep inflation in check, we have avoided large swings in interest rates and thereby allowed the economy to prosper. as you are aware, our target is a relatively flexible one in that we aim to achieve an average rate of somewhere between 2 and 3 per cent. it is that average by which we should be judged, or made accountable. but there are some observers who think that the system should be more prescriptive than this and there should be some strict rule which should determine our actions. for example, a few people still think we should aim to keep inflation between 2 and 3 per cent at all times. this is a clear misinterpretation of our system because it fails to realise that it is the average we are interested in. on a number of occasions, inflation has been above 3 per cent and below 2 per cent.

pre - tax wages ) and reduce the returns to capital. 5 the pressures on the labour supply will be felt more acutely by industries that rely more heavily on labour. most notably, this includes services industries, such as aged care and health care ( graph 2 ). there is, however, likely to be scope for labour to be reallocated across services industries. in particular, an older population will require relatively fewer workers to care for and educate children. graph 2 more demand for services at the same time as labour will tend to be in shorter supply, larger shares of the population will need a degree of assistance and care. indeed, demand can be expected to shift towards services ( away from goods ) given that services constitute a larger share of total consumption for older people than for the rest of the population ( graph 3 ). 6 much of this reflects spending on health care. this extra demand for services will be in addition to that associated with rising wealth. people tend to spend an increasing share of their rising incomes on services in part because there are ultimately limits to the consumption of food, wearing of clothes and use of other goods. this discussion ignores the role of international capital mobility, but given that population ageing is a global phenomenon, the qualitative results of closed and open economy models will be comparable. to gauge the true extent of this we need to account for goods and services that people purchase for themselves directly, as well as those they obtain through the public provision of goods and services, which is what graph 3 has done. bis central bankers ’ speeches graph 3 so, we can expect that ageing will lead to extra demand for services at the same time that it weighs on the supply of services ( via declining labour force participation ). more demand and less supply will push up the prices of services, relative to the prices of goods. this rise in the relative price of services has long been apparent for other reasons. one reason for this is that productivity growth has tended to be greater for goods than for services. that is, we ’ ve got better at producing more goods for a given level of inputs, more so than has been the case for services. another reason is that the global integration of much of asia over recent decades has brought large numbers of workers into the production of traded goods, increasing their supply and therefore pushing down the relative prices of goods. it is important for stronger wage growth, and an increase in the relative prices of services to occur. such signals will encourage higher labour