it must be said, feel that australia ’ s glass is at least half full. yet the nature of public discussion is unrelentingly gloomy, and this has intensified over the past six months. even before the recent turn of events in europe and their effects on global markets, we were grimly determined to see our glass as half empty. numerous foreign visitors to the reserve bank have remarked on the surprising extent of this pessimism. each time i travel abroad i am struck by the difference between the perceptions held by foreigners about australia and what i read in the newspapers at home. i harbour no illusion that this can suddenly be lifted by anything i say today. but it is, hopefully, worthwhile to offer a few facts, and some perspective and analysis of the situation. the multi - speed economy much of our public discussion proceeds under the rubric of the so - called “ two - speed economy ”. it ’ s become very much the description of the moment, and not only in australia. one picks up the same theme in many other countries. indeed it is a description of the global economy. growth in the advanced industrial countries continues to be sluggish, and in some cases output is going backwards. within europe, germany has been doing well, while other nations face huge economic challenges. meanwhile growth in the “ emerging world ” has been pretty robust apart from the effects of natural disasters. so in popular terms, we might say that there are varying lanes on the global growth highway : fast, slow, very slow. there are a few economies in the breakdown lane. turning to australia, we have long had a multi - speed economy. for example, it has been a very long - running trend that population growth tends to be faster in western australia and queensland than in tasmania or south australia. typically, certain industries such as housing construction show the expected differences due to population growth. moreover while we debate the rise of mining and the much heralded “ decline of manufacturing ”, we might note that it has been a very long running trend that output and employment in manufacturing has grown more slowly than in the economy as a whole, and that output of various kinds of service provision has grown faster. that has been happening for at least five decades, and in most countries in the developed world. in the case of australia ’ s manufacturing sector, this decline reverses an earlier rise. in fact, the respective shares of mining and manufacturing in australia ’ s gdp at present are about where they were

a return to the boom. many people say that we need more “ confidence ” in the economy among both households and businesses. we do, but it has to be the right sort of confidence. the kind of confidence based on nothing more than expectations of ever - increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. unfortunately, we have been rather too prone to that misplaced optimism on occasion. you don ’ t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. it would surely be a false basis for confidence. the intended effect of recent policy actions is certainly not to pump up speculative demand for assets. 6 as it happens, our judgement is that the risk of re - igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months. hence, i do not think we should set monetary policy to foster a renewed gearing up by households. we can help, at the margin, the process of borrowers getting their balance sheets into better shape. to the extent that softer demand conditions have resulted from as in 2009, the challenge is “ how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices ”. see stevens, g, “ challenges for economic policy ”, address to the anika foundation luncheon, sydney, 28 july 2009. bis central bankers ’ speeches households or some businesses restraining spending in an effort to get debt down, and this leads to lower inflation, our inflation targeting framework tells us to ease monetary policy. that is what we have been doing. the reduction in interest rates over the past eight months or so – 125 basis points on the cash rate and something less than that, but still quite a significant fall, in the structure of intermediaries ’ lending rates – will speed up, at the margin, the process of deleveraging for those who need or want to undertake it. in saying that, of course, we cannot neglect the interests of those who live off the return from their savings and who rightly expect us to preserve the real value of those savings. popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population – just over one - third – who