there was some rise in unemployment. at the same time, inflationary pressures, which had declined through 2010, appeared to pick up noticeably in the first half of 2011 and the prospects were that inflation would rise to above the target range of 2 – 3 per cent over the next couple of years. that created a difficult environment for monetary policy. as the bank noted after the october board meeting, however, the downward revisions to recent estimates of underlying inflation and the softer global economic outlook have made the outlook for inflation less concerning, providing scope see stevens g ( 2011 ), “ the cautious consumer ”, address to the anika foundation luncheon, sydney, 26 july. bis central bankers ’ speeches for monetary policy to be supportive of economic activity, if needed. tomorrow ’ s cpi data will provide further information in this regard. it remains to be seen how the australian economy will respond to the recent financial volatility and the consequent fall in confidence and the loss of wealth. to date, however, as in the united states, the flow of monthly data in australia has been a little better than might have been expected given the volatile financial environment. retail sales have picked up a little, housing loan approvals also seem to be picking up somewhat, most measures of business conditions remain around average levels and the most recent employment data have been more positive after a number of weak months. nonetheless, job vacancies and advertisements are lower than their peak around the start of the year, overall credit growth remains subdued and the housing market remains soft. recently, there has been some easing in financial conditions following the fall in market interest rates that has accompanied the financial volatility. banks have passed through to borrowers notable declines in interest rates on term housing loans and some business loans, as their cost of funds has declined. increased competition among banks in response to the increased availability of deposits and relatively subdued demand for loans, has also resulted in some shaving of interest rates on standard variable mortgage loans for new borrowers. as a result, the interest rates on new loans are now around 10 – 15 basis points lower than they were early in the year. the modest net fall in the exchange rate in recent months has also, to some extent, reduced pressures on some sectors of the economy. looking ahead as i have noted, as yet there have not been signs outside europe that the rate of growth of economic activity has taken another step down since the recent bout of financial volatility. it is, however,

ric battellino : economic and financial developments address by mr ric battellino, deputy governor of the reserve bank of australia, to citi ’ s 3rd annual australian & new zealand investment conference, sydney, 25 october 2011. * * * introduction 2011 has been a frustrating year for the world economy. the recovery in most of the large advanced economies lost momentum in the first half of the year and financial market volatility and concerns about sovereign debt posed renewed threats in the second half. this led the imf in september to note that the world economy had “ entered a dangerous new phase ”. in many ways, these difficulties can be seen as the continuing after - effects of the financial crisis that gripped the north atlantic economies in 2008. australia, as with most of asia, has to date been relatively shielded from the events in the north atlantic countries. nonetheless, the local economy has not been as buoyant as had been expected at the start of the year and downside risks stemming from further weakness in the major overseas economies or financial market volatility cannot be ruled out. the situation in europe is particularly disturbing since the authorities need to agree on policies that deal simultaneously with excessive government debt, weak banking systems, soft economic activity and sharp differences in competitiveness among european countries. the situation is not all gloom, however. economic data in the united states over the past month or two have, more often than not, surprised on the upside, asia is also generally continuing to do well, and some of the local economic news has also been more positive of late. let me run through some of these issues in more detail. i will start with the world economy. the world economy as you know, 2010 had been a very strong year for the world economy. growth was a little over 5 per cent, which is about as fast as the world economy ever grows. the strong growth was not surprising, as most countries were applying unprecedented amounts of monetary and fiscal stimulus as they sought to recover from the 2008 / 09 recession. it was always expected that economic growth in 2011 would not be as strong. early in 2011, most forecasters were expecting growth for the year of about 4½ per cent ; while this was less than 2010, it was still a very good figure. by the second quarter, however, economic outcomes were beginning to disappoint. in the united states, consumer confidence and spending weakened, possibly due to the strong increases in oil prices that had taken place ; us industrial production