sentiment and in the feedback we were receiving directly from firms. australia was being affected through our trade, financial and business linkages with the rest of the world. australia was doing better than most countries, as had been anticipated. but for a few months it was not clear how much comfort we should take from that, because the economic news from abroad seemed to be so dire. as one metric, the imf ’ s forecasts for global output in 2009 as at last february were for growth of ½ per cent. that was already a marked reduction from a few months earlier. subsequently they were cut further, and when released in late april showed an expected contraction of over 1 per cent, which would be the weakest outcome for at least six decades. forecasts for australia were inevitably marked down as well. the time of our may statement on monetary policy was when the outlook for the local economy seemed weakest. in this environment, the possibility that we would need to ease monetary policy further was obviously canvassed. financial markets expected as much, at one point pricing in a decline in the cash rate to less than 2 per cent. yet the board had already aggressively eased monetary policy, delivering the largest reduction in debt servicing costs to households in modern times. interest rates were low, or in some cases very low, by historical standards. substantial fiscal stimulus was also in train. these could be expected to provide significant support for demand. so even as activity abroad continued to contract, the board had to be mindful of how much action had already been taken in anticipation of serious economic weakness. those measures would take time to have their full effect. but that lag could not be shortened by increasing the dosage. accordingly, while keeping open the option of further easing, the board kept a fairly steady setting through this period. there was one further small decline in the cash rate in april. apart from that, official interest rates have been unchanged since we last met, in contrast to the very sharp falls from september through to february. where then do we stand at present? things abroad hardly look rosy, but they look distinctly better than they did a few months ago. conditions in international financial markets have continued to improve. there have been occasional reversals, but each time the improving trend has resumed. extreme risk aversion has abated ; spreads have narrowed ; capital markets have continued to thaw, though in some overseas cases this has relied heavily on central bank financing activities. financial institutions in the united states and

peak of 5 per cent in september last year. the size of this decline overstates the real extent of the slowing in prices, just as the peak figure overstated the real extent of inflation. measures of underlying inflation remain a good deal higher, at around 3¾ per cent over the year, but they too are gradually declining. we believe that decline has further to go, though in the medium term inflation on either a cpi or underlying basis does not look like it will fall as far as we thought a few months ago. looking ahead, some of the recent strength in private demand might, as i noted earlier, prove to be temporary. but at the same time, the contribution of public spending to growth in demand is likely to increase over the year ahead. more generally, there has been enough genuine strength in the run of recent indicators, sufficient further improvement in financial conditions and enough recovery in sentiment such that forecasters are starting to lift their numbers for overall growth in both 2009 and 2010. as always, there are risks. the global economy could suffer another setback of some kind. the likelihood of that has declined in our view, but the possibility remains. perhaps the growth in china ’ s demand will falter. certainly the pace of china ’ s growth seen in the june quarter, which was extraordinary, cannot continue for long, and may be moderating now. we need to keep an eye out for potential imbalances in china. that said, though, sceptics about the growth of china thus far may have underestimated the determination of the chinese policy makers to grow their economy over the medium term. i doubt that determination has lessened. some of the pick up in global industrial output is clearly due to the cessation of inventory run down, and prospects for final demand will be important in determining the pace of ongoing growth. on that score, the process of balance sheet consolidation for both the private and public sectors in some major countries will probably weigh on growth in demand there for some time. ( i am not talking about australia here. ) on the other hand, performances of both australia and some of our key trading partners have exceeded expectations in the recent past ; that could continue, particularly if rising confidence were to feed further demand, thus increasing income, and so on. that, after all, is the way most recoveries proceed, in cases where there is no strong headwind from financial restructuring. moreover, just as the severity and simultaneity of the