this recent widening in the net interest margin has been largely due to wider margins on banks ’ business lending. the margin on variable housing loans is much the same today as it was at the start of the crisis ; it had fallen until recently and the increase in home loan interest rates in december restored it to around its pre - crisis level. margins on business loans, however, are now substantially higher than they were immediately before the crisis. this comes after a prolonged period when margins on business loans had narrowed. margins on business loans tend to vary over the economic cycle, reflecting changes in perceptions of risk by banks. during periods of a strong economy, banks tend to cut their margins as they see business loans as being less risky. in contrast, when the economic and business outlook is uncertain and loan losses are rising, as has been the case over the past couple of years, banks see loans as being more risky and margins widen. with the economy and business climate now improving, the economic justification for wider margins on loans is becoming less compelling, so it would be reasonable to assume that, in a competitive banking sector, we should see margins level out soon. over the past couple of months, there have been some signs that this is starting to occur. what does this mean for monetary policy? as i have noted, over the past couple of years, the interest rates that matter in the economy – the rates on housing and business loans and the rates on deposits and debt securities – have all risen relative to the cash rate ( graph 6 ). the reserve bank has taken these changing relativities into account in its monetary policy decisions. graph 6 one of the implications of doing so, however, is that it has altered the relativity of the cash rate compared with its historical ranges. i want to end with a few words on this, and what it means for the interpretation of monetary policy settings. as you know, the cash rate is currently 3. 75 per cent. this is still 50 basis points below the previous cyclical low of 4. 25 per cent in 2001. on the surface this might suggest that the cash rate is still unusually low. however, with other interest rates in the economy having risen by at least 100 basis points relative to the cash rate over the past couple of years, they are now above their previous cyclical lows. another way to think about this is that the current level of deposit rates, housing loan rates and business loan rates would have been consistent, before the crisis, with

can affirm that, among policymakers, there is no doubt that forward guidance helps to steer expectations. yet, the effects of forward guidance are not as straightforward as we might like them to be. unsurprisingly, the results depend on a few things : first, on the particular form of forward guidance chosen ; second, on the central bank ’ s credibility ; and, finally, on agents ’ private information and the general level of informational noise. although in practice forward guidance is rarely perceived in such pure terms, here i would like to distinguish between the so - called delphic and odyssean types. delphic guidance is a statement of how policymakers see interest likely to evolve, but it makes no promises about future policy actions. in odyssean guidance, by contrast, policymakers commit to some ( contingent ) actions in the future. the horizon of odyssean guidance can be state - contingent, have an end date, or even be left open - ended. for example, currently, the ecb ’ s forward guidance is that interest rates are expected to remain unchanged at least through the end of this year. research indicates that different types of forward guidance differ systematically in how they impact on expectations and reduce disagreements in the markets about the future path of interest rates. more detailed, specific forward guidance – such as time - and state - contingent odyssean guidance – seems to be more effective in guiding expectations. intuitively, this effect makes sense : such central bank communication tones down some of the informational noise and diminishes uncertainty. nonetheless, this statement should not be interpreted as advocating any particular type of guidance, as the effects should depend on the interest - rate environment in which we are living. thus, in times of low interest rates, we strengthen forward guidance and make it more explicit. when interest rates are not bounded ( and are, therefore, at higher levels ), we can rely on a ‘ lighter ’ form of guidance. going further, any discussion on forward guidance would be incomplete without touching upon the controversy regarding “ who is leading who ” in this “ game ” of exchanging information. is the 2 / 4 bis central bankers'speeches central bank leading the financial markets, or have central banks become overly dependent on the market reaction function? in other words, are we “ catering ” to the markets? meaning, are we putting the needs of financial markets – that is, mainly private investors – before the needs of the real economy