uncomfortable ” would be put into use once more in the post - board statements. it hasn ’ t been, though i don ’ t regard that to be as significant as many people seem to think it is. we have tried to avoid frequent and large language shifts about the exchange rate. it can vary enough from month to month that we risk chasing our tails if we seek to engage too actively in “ jawboning ” each month. but lest there be any uncertainty about this, let me be clear, again, that the exchange rate remains high by historical standards. there is little doubt that significant parts of the tradeexposed sectors still find it quite “ uncomfortable ” : it continues to exert acute pressure for cost containment, productivity improvement and business model change. when judged against current and likely future trends in the terms of trade, and australia ’ s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents. of course, we live in unusual times, with interest rates at the “ zero lower bound ” in several major jurisdictions. nonetheless, we think that investors are under - estimating the likelihood of a significant fall in the australian dollar at some point. housing prices finally on communication and monetary policy generally, there is the question of housing prices. few issues seem as capable of sharply dividing opinions as this one. some use the “ b ” word, sometimes followed by calls for interest rates to be higher. others regard it as unthinkable that interest rates would ever respond to housing prices. still others call for regulatory actions to constrain housing lending, which, by the way, has overall remained quite moderate so far. the bank ’ s views on this have been quite consistent. we have made four points. first, with dwelling prices having fallen between 2010 and 2012, some recovery was not in itself particularly cause for concern, certainly not initially. moreover, if we think there is a need for higher construction, which we do, an environment of declining prices is probably not conducive to that outcome. some pick - up in housing prices as a result of lower interest rates was to be expected ; it shows that monetary policy is working and is part of the normal transmission process. of course, this argument becomes less persuasive if valuations reach new highs and keep rising. so, second, were there to be a further big run - up in prices, with past increases

price moving about too much : it is not only domestic prices that matter for price signals to the domestic economy. and, in any case, consumers care about the cost of living ( ie aggregate prices ). regard as the bedrock or base of good economic policymaking - the application of common sense. in circumstances where countries are receiving large capital inflows which are difficult to absorb, the first question might be whether something could be done to slow down these capital inflows without distorting the economy too badly, in order to help the transition process. the sorts of things which might be done here are very intrusive prudential supervision and various rules ( or at least monitoring ) on all those who borrow overseas, if only to try to put some “ sand in the wheels ”. chilean - style capital inflow controls might also be a possibility. direct foreign investment may be easier to absorb ( the goods inflow comes as part - and - parcel of the capital inflow, so the transfer takes place with less upward pressure on the exchange rate ). having done whatever is feasible and sensible to try to rein in the capital flows ( and hopefully make them less volatile by slowing down the herd ), what should be done then? there is little doubt in my mind that the exchange rate should appreciate. this is part of the necessary process of bringing about the real transfer of resources ( a current account deficit ) which is the counterpart of the financial flows. but, to the extent that the exchange rate may well overshoot in this process, intervention is a legitimate policy option. we all know the constraints and difficulties with this. in particular, it is fiscally very expensive. but it can be a useful instrument in the toolbox, for moderate, occasional and discrete use. the extra element which can, it seems to me, be legitimately applied in these circumstances is to be vigilant in the face of asset price rises, and to use whatever instrument ( within reason ) can be used to prevent such bubbles from occurring - prudential rules, taxation, and even the classic fall - back, bureaucratic red tape. of course, there is some hope that the rising exchange rate might discourage the capital inflows ( the textbooks say that it should ), although i have little faith that this mechanism will work at all smoothly, and there is too much evidence of herd and euphoria behaviour to give me any confidence that flexibility in the exchange rate will be an effective break on the