been carefully monitoring access to funding, including offshore funding. we judge it to have been more than adequate, even if more expensive, though, of course, we will continue to watch the situation closely. but the centre of recent developments has been offshore, so my remarks today are about the global scene, not the australian one, unless specifically noted. background to the present international situation : how did we get here? although the headlines of the past year have been dominated by stories about the sub prime loans in the us mortgage market, in fact the genesis of the problems was much earlier. for this observation has been made by many in the past year, including the bank of england governor, mervyn king ( http : / / www. bankofengland. co. uk / publications / speeches / 2008 / speech333. pdf and http : / / www. bankofengland. co. uk / publications / speeches / 2007 / speech324. pdf ) and federal reserve chairman, ben bernanke ( http : / / www. federalreserve. gov / newsevents / speech / bernanke20070515a. htm ). much of the preceding decade, international capital markets were characterised by the search for yield. an excess of saving over investment in asia was a feature, resulting partly from the reaction to the late 1990s crisis and the determination to avoid a repeat of it. the rapid growth of chinese incomes and the lag between that trend and a corresponding rise in consumption was also a factor. these trends, associated as they were with a surplus of internationally tradeable goods and services, carried a degree of disinflationary impact for the rest of the world, which made strong growth in demand and low inflation easier to combine. they also lowered the marginal cost of financial capital in global markets. somewhat later, oil rich nations also provided funds to the global economy and spurred on this search for yield, since mounting revenues from higher oil prices were invested rather than spent by governments that were now more fiscally conservative. in the major developed countries, interest rates at the short end were also lower than normal for a long period after the mild 2001 recession in some of the g7 countries, as monetary policies sought to manage the particular circumstances each country faced. this was associated with an unusually stable period for macroeconomic conditions. the “ great moderation ” in volatility of output and prices had been under way in the united states since the mid 1980s but

have been prepared to increase the total amount of liquidity substantially, as required. we have widened the range of eligible collateral for repurchase agreements ( we already had a pretty wide range of counterparties prior to last august ). we have also been prepared to enter into repurchase agreements for six months and longer on occasion, given the pressure on market funding rates at that horizon. even with that, however, the relationship between the cash rate ( or, more correctly, the expected future cash rate ) and rates on high quality private paper at a three to six month term is much looser at present than it has tended to be over recent years. this means that the cost to banks of raising funds in the market has moved independently of the overnight rate. the presumption that their lending rates would and should move only in line with the cash rate, which had arisen in an earlier period when all these rates were much more closely related, has not been a realistic one in the recent environment. of course, in setting the cash rate, the reserve bank has taken account of these shifting relationships, just as it does shifts in other relationships in the monetary transmission mechanism. returning now to the global scene, central banks are continually assessing the potential impact on economic activity and inflation from these events, as they evaluate monetary policy settings. in the united states, the federal reserve has responded to evident weakness in economic activity, and the risks posed by the possibility of a significant disruption to credit provision, by lowering overnight rates quickly. elsewhere, policy makers are trying to assess the potential spillovers. the weak us economy and depreciating us dollar will have some impact via reduced trade in goods and services. but that channel is less important than the possibility of financial contagion from a set of forces not confined to the united states but affecting international capital and money markets generally. what complicates matters is that policy makers have to consider that possibility at a time when they are also confronted with a troubling level of inflation in a number of cases. longer term, a number of issues arise that are the subject of intense work in the central banking and supervisory community. arrangements for the provision of liquidity by central banks have been changing in response to the events of the past eight months, but it is likely that there will be continued discussion about whether further refinements might be sensible. these will include how to make arrangements sufficiently flexible and adaptive, including across borders, which may be needed given the