a country as an industrial base or its competitiveness. however, owing to the complexity of the motives driving fdi at the enterprise level and the problems of defining and recording foreign direct investment, great caution ought to be exercised when interpreting the statistical data. i would like to thank dr ulrich grosch for his assistance in preparing this talk. deutsche bundesbank, international capital links, special statistical publication 10, may 2004. the corresponding regular analyses appear in the monthly report ; see deutsche bundesbank, the development of german enterprises ’ international capital links between end - 1998 and end - 2001, monthly report, june 2003, pp 51 ff. the database was presented in alexander lipponer, a “ new ” micro database for german fdi, in heinz hermann, robert lipsey ( ed ), foreign direct investment in the real and financial sector of industrial countries, berlin 2003. claudia m buch, alexander lipponer, fdi versus cross - border financial services : the globalisation of german banks, deutsche bundesbank, discussion paper, series 1 : studies of the economic research centre, no 05 / 2004 and claudia m buch, alexander lipponer, clustering or competition? the foreign investment behaviour of german banks, deutsche bundesbank, discussion paper, series 1 : studies of the economic research centre, no 06 / 2004. in my view, an assessment of the locational quality and competitiveness of a country requires very differentiated approaches. 5 fdi can certainly play a role. however, it is only one indicator among many. above all, one must keep in mind what the statistical term “ foreign direct investment ” actually means. the international definition of fdi represents the mutual comprehensive intra - group financial relations provided there is a “ lasting interest ”. this means that borrowing and reinvested profits are to be included in the statistics. there are good reasons for this. for example, long - term loans which a parent company grants to its subsidiary abroad can be a substitute for equity capital. furthermore, it would not be right to treat retained earnings as anything but new equity capital as part of a socalled “ distribute - recapture ” policy. however, i do see problems with the interpretation of foreign direct investment when taking a look at short - term loans and trade credits. true, these credits count as fdi. but they do not tell us much about the locational quality of a country. in particular cases, short - term intra - group loans can have

year, but most of the forward - looking indicators – including job vacancies – suggest reasonable employment growth over the months ahead. in terms of wages, we are expecting a continuation of the current pace of increase. wage increases of 2 point something have become common across much of the country and we do not see this changing in the near term. the recent inflation data were in line with our expectations, with cpi inflation running at 1. 8 per cent. within the overall cpi there are contrasting trends. the prices of many food items are rising more quickly than they have for some time, largely because of the drought. in contrast, housing - related costs remain subdued, with rents increasing at the slowest rate on record and electricity prices falling in most places. looking forward, we are expecting inflation to pick up to 2 per cent over the next couple of years. i would now like to turn to monetary policy. since the previous hearing, the reserve bank board has cut the cash rate by a further ¼ of a per cent, bringing the total reduction last year to ¾ percentage point. since last october, including at our meeting earlier this week, the board has maintained the cash rate unchanged at 0. 75 per cent. i understand that some people in our community have concerns about interest rates being at very low levels and that low interest rates makes it more difficult for people relying on interest income. i would like to assure these people that we did not take those decisions lightly. rather, we have been responding to two major developments. first, the low interest rates globally. and second, a period of balance sheet adjustment by australian households. as we have discussed at previous hearings, world interest rates have moved lower over the past decade. this is mainly because of structural factors related to ageing of the population, productivity growth, slower population growth and high rates of saving in asia. since we live in an interconnected world, we cannot ignore this shift in world interest rates. on the domestic front, as i discussed earlier, households have been responding to the period of low wages growth and a fall in housing prices. this has resulted in a period of low consumption growth and below - average economic growth. if interest rates had not been reduced last year this adjustment in household finances would have been more difficult and the overall economy would have suffered. the lower interest rates have made it easier for people to manage their debts and, on the other side of the balance sheet, they have boosted asset values. in doing so, they