the interest of the us economy. the interpretation gained added plausibility, despite later denials, when it was seen in conjunction with the fed ’ s earlier announcement on downward risks to the inflation outlook. the likelihood that the us dollar might decline further, with tacit acquiescence from the us authorities, has led many observers to believe that a significant change is occurring in the international environment. a declining us dollar helps the us economy adjust to its problems, but also shifts those problems in part to other countries. in passing, i have to say that i am not criticising the united states for this – to date, they have shouldered more than their fair share of the responsibility for getting a global expansion going. but, if we are interested in increasing global growth, rather than just having a redistribution of the pattern of growth between countries, many countries which have enjoyed the stimulus of exporting to the united states when the us dollar was high will need to find domestic sources of expansion. there is a great deal of scepticism about how successful the two main areas outside the united states – japan and the euro area – will be in this endeavour. it is in this general context that some central banks have reduced interest rates over the past few days. as you know, we did not. this was not because we are unaware of the downward risks that are presented by the global economy, nor because we think our economy is somehow immune to international problems. it was because we clearly have stronger domestic conditions in place already as a result of current policy settings ( not to mention higher inflation than most countries ), and hence have not had the same sense of urgency in reducing interest rates that several others clearly did. we are, however, very conscious of the risks the australian economy faces. obviously, the first one is that the world economy fails to recover and that, in time, this feeds through to a protracted weakening in the australian economy. the main direct channel through which this could occur would be a further weakening in exports. at the same time, we have seen that because our economy is healthy relative to others, and hence our interest rates are not as low as others, foreign investors have found australian dollar - denominated assets attractive to acquire. thus, a second channel could be through an excessive appreciation of the australian dollar. not that i think what has happened to date could be in any way labelled excessive. the trade - weighted exchange rate has returned to its post - float average, while the

gdp to grow by 3 per cent through the year to june 2003, that is through the present financial year. this was slower than in other recent years, and an important reason for this was the temporary contractionary influence of the drought. when we moved the forecast horizon along six months, that is to the end of 2003, we expected the growth rate to rise to 3¾ per cent. the outcome for growth through 2002 / 03 looks like it will be close to the 3 per cent forecast, or only a little below it. as we look slightly further ahead, however, prospects are not as strong as they were. instead of 3¾ per cent through calendar 2003, growth might now be more like 3 per cent. what has caused this downward revision to the outlook? the main explanation is the weaker performance of the world economy we have seen to date, which is affecting australia ’ s trade performance. our imports have continued to grow in line with our quite strong domestic demand, but our exports have fallen appreciably, and there is less confidence that they will be lifted in the near future by firmer foreign demand. i will say more about this in a few minutes. the inflation forecast i gave last time was for the rise in the cpi to exceed 3 per cent in the near term and then to ease to about 2¾ per cent in the 12 months to end 2003. the first part of this forecast has occurred as the cpi in the most recent 12 - month period ( to the march quarter 2003 ) ran at 3. 4 per cent, pushed up by the high oil prices in that quarter. but the oil price pressures have already reversed, and when we looked at the likely outcome in the remainder of 2003 and into 2004 in the may statement on monetary policy, we reduced our inflation forecast from 2¾ per cent to 2½ per cent, largely because of the higher exchange rate for the australian dollar. since the statement was released, of course, the exchange rate has risen further. let me say a little more about the domestic economy. the thing that stands out is that domestic demand had been growing at a very high rate. for example, it grew by 6½ per cent last year. this was unlikely to be continued over a long period, and over the most recent four quarters, it has slowed to 5½ per cent. we expect some further deceleration as we look ahead, but the most recent data do not suggest it will be large. consumption has grown by 3½