one important forecasting issue is whether this is likely to continue, or whether a return to closer - to - average productivity growth will see potential output grow a little more quickly than we have become accustomed to over the past decade. the latter is clearly the preferable outcome, although as yet there are few signs of a lift in productivity growth. a second question is the implications for inflation. if indeed potential output growth were to pick up, this would mean that the economy could grow more quickly over the medium term without causing inflation to rise. but in the short term, producing and installing the increased capital can add to demand pressures in the economy. of course, one way in which these pressures can be mitigated is by importing the required machinery and equipment. to some extent this is what has been happening. much of the physical capital for a number of the large resource projects is, by necessity, imported. and the appreciation of the exchange rate has lowered the relative price of capital goods from abroad. over time, imports of capital goods have grown considerably more quickly than investment ( graph 5 ). yet, even as we rely more on imported machinery and equipment to increase the capital stock, it still takes significant domestic resources to install this imported machinery and equipment. so an important forecasting issue here is to what extent the period of accelerated growth in the capital stock will affect inflation pressures in the economy, and to what extent can these pressures be reduced by importing goods from abroad. graph 5 a third question is the implications for the risk profile of the overall economy of the higher capital stock. while the central scenario is a positive one, there are risks. in the late 1980s, for example, we saw a large increase in the capital stock, particularly of commercial buildings, but when the recession came, much of this investment had to be written off. the result was large losses to banks and investors. similarly, there is no guarantee that the current wave of investment will earn high returns. so a relevant forecasting question here is how these risks are likely to play out and how they are influenced by the way in which the increase in the capital stock is financed. in thinking about each of these three questions – the impact on potential growth, the implications for inflation and the changing risk profile of the economy – it is the combination of judgement, models and liaison that i discussed a few moments ago that we rely on. as in other areas, we do not have fixed views, but instead we are continually testing,

then do you think it is working? ladies and gentlemen, we are partners and stakeholders in this transformation and therefore we must be careful of the messages we send. we need to have frank and open dialogue on where we are going, how we get there, the remaining challenges we face and how to address them. the central bank remains committed to consultation with you and on that note, i want to thank your president for the way he has engaged the bank as a key contributor to the foreign exchange market development committee. he has been leveraging the wealth of information and expertise freely available at the bank and we in turn have learned a great deal from him, which has helped to improve the service we deliver. thank you. 4 / 4 bis - central bankers'speeches