, it is quite possible that the past six months will turn out to have been the period of maximum weakness in the chinese economy. of course, it will be a while before we know one way or another. the australian economy like all other economies, the australian economy was very much affected by the extraordinary events of last september. as in other countries, confidence was severely eroded by the spectacle of large us financial institutions either collapsing or coming under immense financial strain. concerns began to arise about the safety of our own financial institutions, even though they were in a very strong position. the australian government therefore elected, as did governments in other countries, to guarantee the debts of banks. in addition to these adverse confidence effects, the australian economy was also affected by the collapse of commodity prices. mid last year, commodity prices were at boom levels ; six months later, many had broadly halved. this has resulted in a large loss of real income to the economy. the fall in commodity prices has also caused businesses to revise down sharply their investment plans in the year ahead. households have also become much more cautious, cutting back on spending and increasing saving. all this meant that there was a sharp change in the outlook for the economy in the closing months of last year. the reserve bank responded to this with a very substantial lowering of interest rates : between september last year and february this year the cash rate was reduced from 7¼ per cent to 3¼ per cent. other central banks have also cut official interest rates sharply, but in many cases, because of problems in their banking sectors, this did not flow through to any great extent to interest rates faced by households and businesses. in essence, the monetary policy transmission mechanism in many countries has become severely impaired, which is why some central banks have resorted to non - traditional monetary measures. this problem has not arisen in australia. the monetary policy transmission process has been effective and there remains scope to ease policy further if circumstances require. the 400 basis point reduction in the cash rate since last september has reduced the overall cost of funds to banks by 340 basis points, after taking into account movements in interest rates in global capital markets. on average banks have cut interest rates on loans by the same amount – i. e. they have on average fully passed on the fall in their cost of funds to borrowers. interest rates on housing loans have fallen by more, while interest rates on some consumer and business loans have fallen by less. as a result of the reductions that have

investment returns have a big impact on decisions about how much we need to save out of income, and for how long we need to work, in order to accumulate a given amount of money. as a rule of thumb, for every one percentage point reduction in the long - run average return on savings, households would need to increase the proportion of income saved over their working lives by 3 per cent in order to accumulate a given amount of assets. alternatively they would need to work for an additional 3 years. it is interesting that, over the past year, as the share market has fallen, the household saving rate has increased substantially and more older workers are either remaining in, or returning to, the workforce. even after the large fall in wealth over the past year, the household sector is still in a relatively sound position. if we look at household balance sheets, we see that, on the liabilities side, households on average have debt equal to about one and a half year ’ s income. on the assets side, they have a property valued about 4 years ’ income and financial assets equal to 2½ years ’ income. let me end with a few words on the housing market. this market was fairly subdued in 2008, with prices falling on average by 3 per cent across australia. some states – such as western australia which had a late boom – are now experiencing larger falls than average. prices at the top end of the market have also been softer than other segments, no doubt reflecting the deleveraging that is taking place among high income households following the global financial crisis. overall, however, the housing market in australia has held up pretty well compared with that in countries such as the us and the uk, where prices have fallen in the order of 20 per cent. we continue to believe that the market here will hold up better than overseas. there are a number of reasons why this is likely to be so, but perhaps the most important is that we did not have the same deterioration in lending standards that occurred elsewhere. by and large, the great bulk of australians who took out housing loans have been able to afford the repayments. notwithstanding some rise over the past year, the 90 day arrears rate on housing loans is only 0. 5 per cent, which is broadly in line with its long run average and well below that in countries such as the us and uk. in the period ahead, there will be forces pulling the arrears rate in opposite directions. on the one hand, as