##a ’ s monetary policy objectives – maintaining low and stable inflation and full employment. [ 1 ] these have long been at the centre of our monetary policy framework. the independent review of the reserve bank of australia recognised that this framework has served australia well. it recommended some enhancements to modernise and clarify the objectives. i am currently working with the treasurer to do this. these changes won ’ t, however, fundamentally change the way we formulate monetary policy. the inflation objective is widely understood, having been the centrepiece of monetary policy since the early 1990s. the board has targeted a rate of consumer price inflation of between 2 and 3 per cent on average over time. this inflation target is central to monetary policy because it contributes to the economic prosperity and welfare of australians in two ways. the first is by avoiding the direct damage that high inflation does to households and businesses. high inflation erodes the value of savings and reduces the purchasing power of households. it especially hurts those on low incomes. as former governor philip lowe often stated, history has taught us that sustained high inflation also inevitably leads to higher interest rates and unemployment. the second way that achieving the inflation target helps australians is by laying the foundations for economic growth and jobs creation. maintaining low inflation gives households and firms more certainty when planning for the future. it also facilitates a better allocation of resources. both of these, in turn, support increased investment and productivity growth. the board ’ s second objective is to maintain full employment. as i have noted previously, [ 2 ] it is hard to overstate the importance of full employment. being employed not only supports people financially, but also provides them with a sense of purpose. it helps to foster mental and physical wellbeing. these benefits are especially felt by those that find it harder to get jobs, such as the young or less educated. and there are broader societal benefits from higher workforce involvement, such as an increased prospect of more, and more diverse, ideas being generated. the rba has always had a full employment mandate alongside low and stable inflation. we are now adopting the review ’ s recommendation to make that ‘ dual mandate ’ more explicit. so what is full employment? in theory, it is the level of employment at which there is a balance between demand and supply in the labour market ( and in the markets for goods and services ) with inflation at the inflation target ; this is the maximum level of employment that is consistent with our price stability mandate. when demand for workers is well below

pressure in the corporate sector and the financial system, which had continued since the bursting of the economic bubble, had mostly been removed. when we introduced the quantitative easing policy, the japanese economy was in a recession triggered by the collapse of the global it bubble. financial institutions were burdened by a huge amount of nonperforming loans ( npls ) and there was strong concern about the stability of the financial system. in this situation, a risk of the economy falling into a vicious circle of falling prices and deteriorating economic activity, in other words a deflationary spiral, was also a concern. in these circumstances, the quantitative easing policy played a significant role in maintaining the stability of the financial markets and the accommodative financial environment and in preventing a contraction of economic activity. under the accommodative financial conditions, firms have, after great effort, cast off the three excesses - - excess employees, excess capacity, and excess debt. financial institutions have almost resolved the npl problem, and stability was regained in the financial system. major and regional banks posted their highest - ever profits in fiscal 2005, exceeding the record of the bubble period, and their interim results indicated that their profits have remained high in the current fiscal year. repayment of public funds totaling 12 trillion yen injected into financial institutions proceeded, with the three major financial groups completing redemption in autumn this year. with the strengthening of the capital position, financial institutions'risk - taking capability has been recovering and as a result their lending attitude has become positive. against this background, the year - on - year rate of change in outstanding bank loans has turned positive this year for the first time since 1996. vi. new framework for the conduct of monetary policy as the japanese economy is heading toward normalization, we have altered the framework of monetary policy to support movement in that direction. under the quantitative easing policy, we conducted monetary policy in line with the commitment expressed in terms of developments in the cpi. this was a way, when we faced the zero constraint on nominal interest rates, to produce an additional monetary easing effect by intentionally sacrificing the flexibility of policymaking. in contrast, the new framework for the conduct of monetary policy, introduced when the quantitative easing policy was terminated, is a forward - looking framework whereby the bank's thinking behind the conduct of monetary policy is made public along with its projection for the economy and prices and risk factors. at the same time, it was announced that the policy board members '