bank has published an analysis of funding costs, which provides a useful framework for thinking about these issues, so i won ’ t go into them in detail. 1 i will simply make a couple of observations. first, during the easing phase, interest rates for most borrowers still came down quite significantly, because the cash rate changes were so large. for mortgages, floating rates in the past year reached their lowest level since 1964. at the margin, the cash rate cuts were larger than otherwise because the board could see that spreads between intermediaries ’ rates and the cash rate were tending to widen. likewise in future decisions, the board will take careful note of any tendency for spreads to change. davies m, c naughtin and a wong ( 2009 ), ‘ the impact of the capital market turbulence on banks ’ funding costs ’, rba bulletin, june, pp 1 – 13. available at < http : / / www. rba. gov. au / publicationsandresearch / bulletin / bu _ jun09 / impact - cap - mkt - turb. html > second, in australia, housing loan rates came down much more than has been the case in many countries. this was partly because of the prevalence of floating rate housing debt here, but also because spreads on housing loans ( relative to the policy rate ) widened by less in australia than other countries. that is to say, monetary policy still works pretty effectively in australia. the conduct of policy during the crisis going into the crisis, the global economy had been growing strongly. global gdp expanded by 5 per cent in 2007, which capped off several years of well above average performance. the us economy had been slowing for a while as concerns mounted over the financial problems, but even into the first quarter of 2008 global gdp was still expanding at 4 per cent. prices for most commodities were still rising ; oil prices would not reach their peak until july that year. our economy was operating at full stretch, with our terms of trade showing their largest rise in 50 years and delivering a very large income gain to the community. confidence was high ; firms routinely complained of labour shortages ; inflation was tending to rise, worryingly so in the second half of 2007 ; and demand for credit was strong. in this environment, the board was running tight monetary policy to contain inflation. we now know ( but could not know for sure at the time ) that cpi inflation was on its way to 5 per cent. measures of underlying inflation,

the bank is lucky to have so many talented people and i want to bring out the best in them. but to achieve the vision i set out at the start – an institution that values and encourages diverse and inclusive perspectives – is going to require us to focus on our culture and leadership. we have already taken a few steps here. building on the recommendations of the review, we have identified some specific areas where our culture does not yet sufficiently encourage this kind of discussion and idea sharing. these include : the level of comfort our people have in challenging, particularly those more senior than them ; the style and nature of our internal debate ; and a perception that leaders don ’ t listen to alternative views. you will see that there is a bit of a theme there – leadership. we won ’ t change the culture unless we can change our leadership behaviours. so we are investing in training and support for our leaders – including our executives – to help them be more open and inclusive. and this training needs to be put into practice. we will therefore set clear expectations, introducing ways to measure the performance of our leaders, and then holding them accountable for their contribution to the vision. i also need to set an example. i am encouraging more active debate and challenge than we have seen in the past, including of my own views, in a respectful and constructive manner. to make clear my commitment to creating a diverse and inclusive workplace where everyone feels they belong, i have decided to stay on as the chair of the bank ’ s diversity and inclusion council – a role that from its inception was held by the deputy governor. changing culture takes time. but i know our staff are committed to making the bank as effective as it can be, and i am confident that we will see material change over coming years. i hope that will also be visible to those outside the bank. conclusion the coming year is going to be challenging for the bank on two fronts. we still have to bring inflation back down to target while preserving as much of the gains made in the labour market over the past few years as possible. we are still seeking to tread that narrow path. at the same time, we are changing our monetary policy processes and improving our culture. and while i haven ’ t talked about it tonight, there is also substantial work underway to change our governance and uplift our risk management. but despite this large workload, i consistently hear from the bank ’ s staff that they support these changes. i am confident that we will meet