and posing new questions and challenges. in this context, i would like to touch briefly on three issues. the first is the challenge that low interest rates pose to anyone who is seeking to fund future liabilities. low interest rates mean that the present discounted value of these liabilities is higher than it once was. in turn, this means that more assets are needed to cover these liabilities. for anyone managing a long - tail insurance business or a defined benefit pension scheme, this is a major challenge. it is also a challenge for retirees and those planning for retirement. the second issue is the effect of low interest rates on asset prices. just as low interest rates increase the value of future liabilities, they increase the value of a given stream of future revenue from any asset. the result is higher asset prices. another way of looking at this is that faced with low returns on risk - free assets, investors have sought other assets, and in so doing they have pushed up the prices of these assets. a good example of this is commercial property, where investors have been attracted by the relatively high yields, pushing prices up even though rents are declining ( graph 10 ). a rise in asset prices is, of course, part of the monetary transmission mechanism. but developments here need to be watched very carefully. history is littered with examples of unsustainable asset price rises emerging on the back of perfectly justifiable increases in prices. in a number of cases, this has ended badly, especially if there is leverage involved. also, we should not lose sight of the fact that interest rates and the returns generated from assets are ultimately linked to one another. so, interest rates may be structurally lower in part because the stream of future income generated from assets is also lower than in the past. this would have obvious implications for the sustainable level of many asset prices. the third issue is the effect of low interest rates on firms ’ investment decisions and hurdle rates of return. in today ’ s environment, it seems that many investors have, reluctantly, come to accept that they will earn lower yields on their existing assets. an open question though is whether the same acceptance of lower returns is flowing through to firms ’ decisions about the creation of new assets – that is, their own investment plans. the international evidence is that the hurdle rates of return that firms use for new investment are quite sticky and that they are not very responsive to movements in interest rates. 3 there is less evidence of this issue in australia,

forces that commenced in the 1980s and continued through the 1990s and which prompted australian businesses to lift performance closer to global benchmarks. all of the australian business people here today are, i know, intimately familiar with this phenomenon. furthermore, it is unlikely that the process of converging to global best practice is yet complete, and those practices themselves are continually improving - hence there is every reason to think that strong ongoing productivity gains can occur in the current decade. as the process of putting surplus resources to work approaches its limit, the task of lifting the productivity of the already - employed resources takes on even more importance, if growth in material living standards is to be maintained at the current rate. what can go wrong? the above is not an unattractive scenario. but of course it presumes that growth continues. the business cycle has not been repealed, however, and so with 11 years of growth under our belt already, rather than presume on growth indefinitely, we should ask : what can go wrong? many of us might immediately think of some global calamity, with one or more of the major regions relapsing into recession, delivering an even more difficult international environment than we face now. our view, as i noted earlier, is that this is not the most likely scenario - but it is obvious to all that the risks of weaker international outcomes have risen considerably over the past six months. if that did occur, it would naturally affect australia. we have come through a few tests in recent years fairly well and we would have good grounds to believe that we would be less adversely affected than many other countries in this scenario. in the recent international cycle, it has helped to have been a user, rather than a producer, of itc ( information technology and communications ) goods. it has helped to have avoided the worst of the hype and excess of the “ new economy ” mania, and to have had a long list of well - managed, profitable “ old economy ” businesses. and it has helped to have all the supply side flexibility resulting from many years of difficult economic reforms, as well as flexible macroeconomic policy structures. but even with all that, we have been affected by the global weakness of the past year, and we could not expect to sail through unscathed if the world economy were to falter in the near future. we cannot do much about the world economy, other than watch what happens and respond as best we can to whatever unfolds. but