do we actually mean by bond market liquidity? often participants in this debate talk at cross purposes using different metrics of liquidity, so let me explain how we are assessing bond market liquidity. market liquidity is the ability to execute transactions in size, immediately, at low cost and with limited price impact. as you can see, there is both a quantity and time element to liquidity which is often conflated in discussions about it. debelle g ( 2015 ), ‘ bond market liquidity, long - term rates and china ’, speech at the actuaries institute ‘ banking on change ’ seminar, sydney, 16 september. markets committee ( 2016 ), ‘ electronic trading in fixed income markets ’, markets committee publications no 7 available at < http : / / www. bis. org / publ / mktc07. htm >, bank for international settlements, basel. cgfs ( committee on the global financial system ) ( 2016 ), ‘ fixed income market liquidity ’, cgfs papers no 55, bank for international settlements, basel available at < http : / / www. bis. org / publ / cgfs55. htm >. jon cheshire made a significant contribution to both of these papers. cheshire j ( 2016 ), ‘ liquidity in fixed income markets ’, rba bulletin, june, pp 49 – 58. bis central bankers ’ speeches given these different dimensions to liquidity, measuring it precisely is not a straightforward exercise. this is particularly the case in australia, where much of the secondary market activity is not conducted on electronic platforms and so the trade data is less readily available. it would be good to see more trade data on transactions in the market, although, in saying that, it is possible to have too much transparency in this regard. this is particularly so in a relatively small fixed income market like that in australia, where the revelation of market participants ’ positions in close to real time can be problematic. the first metric i will use to illustrate developments in liquidity is turnover ; that is, the quantity dimension. i will discuss the price aspect below. a smaller share of the stock of outstanding bonds is being transacted relative to the past ( graph 1 ). the turnover ratio ( the ratio of the value of transactions undertaken in bond markets over the course of a year relative to the average outstanding stock of bonds on issue over the year ) for government bonds has declined from an average of around five in the

, the effect of inflation is the same. it erodes the value of savings, puts pressure on household budgets and hurts people on low incomes the most. and the economy doesn ’ t work well when inflation is high. it is harder for businesses to plan, and people spend time protecting themselves against inflation rather than on more productive activities. and if inflation becomes ingrained in expectations, it requires higher interest rates and a large increase in unemployment to get it back down again. to illustrate the point, in both the united states and australia, when high inflation became entrenched in the 1970s and the 1980s, the unemployment rate ultimately ended up rising by at least 5 percentage points to get inflation back down ( graph 4 ). graph 4 disinflationary episodes * % united states % australia inflation unemployment * shading indicates labour market downturns, from trough to peak in unemployment rate. sources : abs ; rba ; refinitiv this is one reason why the reserve bank is determined to ensure that this current period of high inflation is temporary. we will do what is necessary to make sure that high inflation does not become ingrained. the tool that we have to do this is interest rates. i acknowledge that the effects of higher interest rates are felt unevenly across the community. the most direct effect for households is on the cash flows of people with variable - rate mortgages. but this is only one of the many channels through which monetary policy works. higher interest rates also affect the prices of all assets, including the exchange rate and the prices of housing. they affect the cost of new finance for borrowers and the incentive for everybody to save and spend. higher interest rates affect residential construction activity and the investment environment facing all firms. they also affect expectations of the future and thus the pricing decisions of firms and wage outcomes. so, there are many channels through which monetary policy works, other than the impact on mortgage rates. these various channels take time to work, but they do work, and they are working to establish a better balance between supply and demand in the economy. as i have discussed on previous occasions, the reserve bank board is navigating a narrow path. we are seeking to bring inflation down in a timely way while keeping the economy on an even keel. if we can successfully navigate that narrow path, inflation will return to target in a reasonable time and we will be able to preserve some of the gains in the labour market that i spoke about earlier. that is our ambition.