into the production of steel. the outlook for the lng sector also remains very positive. this boost in the terms of trade this year will add significantly to national income. in putting together the reserve bank ’ s forecasts it has been assumed that more of this boost to income is saved than was the case in the earlier boom in the terms of trade. this reflects two factors. the first is the different position of the federal budget and the second is the more cautious approach to spending currently being displayed by the household sector. if this lift in saving does not occur, then demand in the economy could well be stronger than forecast, and this would put additional pressure on capacity. at the moment though, with the economy still emerging from the earlier downturn, there is still some spare capacity and conditions clearly differ across sectors. retail spending remains subdued following the large increase last year, and commercial construction is weak outside of the boost from public - sector infrastructure spending. in contrast, dwelling construction continues to pick up, the period of business - sector deleveraging looks like it has come to an end, and investment in the resources sector is at very high levels. the bank will continue to monitor these differences carefully. overall though, the central scenario for australia remains a positive one. our major trading partners are growing solidly, commodity prices are high and domestic income is likely to grow strongly over the year ahead. if this central scenario were to eventuate, a major challenge will be to expand the supply side of the economy so that demand can grow solidly without adding to inflation. at the same time, we need to be aware that circumstances can change quickly. if they do, australia is in the fortunate position, as are a number of countries in asia, of having the policy flexibility to be able to respond. inflation the third issue i would like to talk about is recent trends in inflation in australia. the march quarter cpi confirmed that inflation pressures have moderated significantly ( graph 9 ). in mid 2008, underlying inflation was running at a little above 4½ per cent, a level that was clearly too high, with the economy pushing up against capacity constraints. in contrast, over the past 12 months, the various measures of underlying inflation all suggest that it is now running at around 3 per cent – a marked reduction from rates two years ago. graph 9 this decline reflects two broad developments – the earlier slowdown in demand growth and the appreciation of the exchange rate. the downturn in the economy in late 2008,

, the board has been seeking to balance the benefits of stimulatory monetary policy with the medium - term risks associated with high and rising levels of household debt. the current low level of interest rates is helping the australian economy. it is supporting employment growth and a return of inflation to around its average level. encouragingly, growth in the number of australians with jobs has picked up over recent months and the unemployment rate has come down a bit. the investment outlook has also brightened. inflation has troughed and it is likely to increase gradually over the next couple of years. these are positive developments. even so, it will be some time before we are at what could be considered full employment in australia and before underlying inflation is at the mid - point of the medium - term target range. this means that stimulatory monetary policy continues to be appropriate. the board has been conscious that attempting to achieve faster progress on unemployment and inflation through yet lower interest rates would have added to the risks in household balance sheets. lower rates would have encouraged faster growth in household borrowing and added to the medium - term risks facing the economy. our judgement has been that it was not in the public 1 / 4 bis central bankers'speeches interest to encourage an already highly indebted household sector to borrow even more. more borrowing might have helped today, but it could come at a future cost. so the board has been prepared to be patient and has not sought to overly engineer or fine - tune things. in our view, the balance we have struck is appropriate and it is likely that the economy will pick up from here as the drag from declining mining investment comes to an end. our central scenario is for growth of around 3 per cent over the next couple of years and for the unemployment rate to move lower gradually. in striking the appropriate balance in our policy setting, we have paid close attention to trends in household borrowing, given the already high levels of debt. over the past four years, household borrowing has increased at an average rate of 6½ per cent, while household income has increased at an average rate of just 3½ per cent. given this, the rba has worked closely with apra to ensure that lending practices remain sound. rightly, apra has had a strong focus on loan serviceability calculations. in some cases, loans were being made where the borrower had only the slimmest of spare income. apra has also introduced restrictions on growth of investor loans and restrictions on interest - only lending