in underlying terms. when we look out to june 2000, our guess for the cpi is 2¾ %, with 2¼ % for underlying. on unemployment, we have also not changed our view. when we met last time, the unemployment rate had been averaging 7½ %, and we expected it to edge down over the remainder of the year. this is what it has done, so that now it has averaged 7. 2 % over the past three months. we expect that it will go down further so that we will see some numbers less than 7 by june next year. the balance of payments has also turned out very much as expected. for quite a while, we had been forecasting the quarterly current account deficit to reach 6 % of gdp, and it finally did so in the june quarter and will probably remain at about this level through this financial year. it was surprising that the current account did not deteriorate faster and further, given the disparity between our growth rate and that of our trading partners. while the slowness of the deterioration has been a pleasing development, we think that the improvement could be some time in coming. in summary, we are expecting that the current financial year will be another good one for the economy. growth will be a little lower than its recent peak, but still good, and inflation should be within the average we aim for. considering that this is the ninth year of the expansion, such a result would mean that no major imbalances had emerged. the aim, as usual, is to keep the expansion going and to avoid the emergence of problems that would threaten its continuation. monetary policy this brings me to monetary policy. the most important development here was the tightening immediately after our november board meeting when the overnight cash rate was raised from 4. 75 % to 5 %. while i think this adjustment has been quite well received by the community, it is still worth spelling out some aspects which lay behind the decision. i would like to start by putting it in the international context, not because we have to follow what other countries do, but because there are some international developments that are a common background to all countries. one such development was the changed perceptions about the world economic outlook in 1999 and 2000. if you remember, 1998 was a weak year for the world economy, largely because of the widespread fallout from the asian crisis. at the beginning of this year, things looked as though they were getting worse, and most forecasters – public and private –

to argue against it on the grounds that we should not act until our inflation forecast clearly exceeded 3 % would be to argue for a very “ stop - go ” approach to monetary policy. it would be equivalent to saying that the most expansionary setting reached during the downward phase of the interest rate cycle should be maintained until such time as a move to a clearly restrictive setting is required, and only then should a move be made. this would virtually guarantee that such a move would be a large one. what about the gst? not everyone will be convinced by the arguments i have used above. some people still cannot understand why you would tighten unless the economy was overheating, and assume that there must be a hidden agenda. others are keen to play the old game of trying to find a political dimension to monetary policy. this has led to claims that the real reason is our fear of the inflationary effects of the gst, but that we are too diplomatic to say so. i am sorry to disappoint the proponents of this view, but that is not the case. • if the gst was the reason for tightening monetary policy, why have the fed, the bank of england, the ecb, the bank of canada, the reserve bank of new zealand, etc. tightened monetary policy? as i have said elsewhere, i am not aware of the forthcoming introduction of a gst in any of these countries. • our starting point has always been that the imposition of the gst will affect the level of prices, but not the ongoing inflation rate. this will require that businesses do not engage in opportunistic pricing by raising their prices by more than is warranted by the net impact of the gst and reductions in indirect taxes. if that is the case, the gst should not have an effect on wages because wage earners will gain more from the accompanying fall in income tax rates than they will lose from the introduction of the gst. the net effect of the tax changes will be to increase the disposable income of wage earners by more than the increase in their expenditure, as is evidenced by the fact that the package involves a cost to the budget. • monetary policy is based on a view that inflation will be within the target immediately before the gst is introduced and that it will be back within the target a year later. this view, in turn, is based on the assumption that there will be no second round effects due to higher wage