for banks to conserve their own – suddenly scarce – capital resources. the soundness of the two large quasi - public us mortgage agencies, which carry rather little capital, has also came into question, necessitating support from the us government. meanwhile the us has seen house prices falling and house construction is at its lowest for many years. the us economy continued to expand in the first half of 2008 due to solid business investment spending, the impact of the fiscal stimulus, and strong export performance, helped by the lower us dollar. in fact, the us was the strongest performing g7 economy in the june quarter, with other major developed countries showing a significant weakening. but most forecasters continue to be fairly cautious about prospects for the us economy in the second half of the year and are now also concerned about the sorts of credit losses that are routinely associated with a period of weak macroeconomic conditions. some fairly significant changes of a financial nature are also occurring in australia. share prices rose in april and may, but gave back all those gains in subsequent months and at present are down by about 30 per cent since the peak in late 2007. corporate boards are taking a more cautious approach to debt and there has been a marked reduction in business credit growth. this seems to have been more pronounced in the case of loans to large companies, though growth in credit to smaller enterprises has also slowed. entities with complex financial structures and / or high leverage have come under pressure and are looking to de - leverage their balance sheets. but overall, what we see in the australian financial scene is an order of magnitude less troubling than what we see abroad. this, mr chairman, is an important point to emphasise. the balance sheets of the bulk of corporate australia are not over - geared. australian financial institutions continue to present a contrasting picture to their peers in the us, europe and the uk. they have adequate access to offshore funding – albeit at higher prices than a year ago. they have tightened credit standards for some borrowers, particularly those associated with property development, and are holding a higher proportion of their balance sheets in liquid form. some have had to make provisions for unwise exposures that had been accumulated earlier. but even in these cases, capital, asset quality and profitability remain very sound. the money market is functioning more smoothly than it was six months ago, with short - term interbank spreads relative to official interest rates down a little. there are also signs that the securitisation market, which

monetary policy. as that picture has gradually emerged over the past few months, the question has then arisen as to when the stance of monetary policy should be recalibrated as well. at its august meeting the board believed, and stated, that conditions were evolving in a way that was increasing the scope to move towards a less restrictive policy setting – one that presses less firmly on the brake. at the september meeting the board took a step in that direction. the logic of this decision was the same as the one that, some years earlier, had led the board to begin raising rates from unusually low levels : the setting of policy designed to get the economy to change course probably will not be the right one once the change of course has occurred, and it will need to be adjusted. a further consideration was that conditions recently had actually tightened marginally as a result of rises in lenders ’ interest rates, which from a macroeconomic point of view was not needed. accordingly, the cash rate was reduced by 25 basis points last week. the decision was quite widely anticipated, and less restrictive conditions in the money market had already been in place for about a month before the board ’ s decision. since the end of july, key benchmark interest rates have fallen quite noticeably. the rate on 90 - day bank bills has fallen by almost 60 basis points, while the three - year swap rate has fallen by about 80 basis points. various rates for fixed - rate loans had already declined before the board ’ s decision, while variable mortgage rates have quickly reflected the decline in the cash rate. the exchange rate has also declined. while some of this change is really a us dollar story rather than an australian dollar story, our currency has declined somewhat against other currencies and on a tradeweighted basis. admittedly, we are probably six months away from seeing clear evidence that inflation has begun to fall, and even then it has to fall quite some distance before it is back to rates consistent with achieving 2 - 3 per cent on average. a somewhat larger fall in inflation overall is required on this occasion than was the case in either 2001 or 1995, which were the comparable previous episodes, since the peak inflation rate this time is higher. rather than trying to achieve that larger fall in inflation by pushing it down more quickly, the board ’ s strategy is to seek a gradual fall, but over a longer period. this carries less risk of a sharp slump in economic activity, though it does require a longer period of