to expect. but the truth is that the best we can bis central bankers ’ speeches do when talking about the future is to speak about likelihoods and possible alternative outcomes. this is not a counsel of despair. it is not as though we can say absolutely nothing about likely performance. we know something about average rates of growth through time, and we know something about the long run forces that work to produce them ( productivity and population growth ). we know that there have been, and will be again, periods of recession and recovery, though our ability to forecast the timing of those episodes is limited. we know from experience some things about the nature of inflation, including its characteristic persistence, and the things that can push it up or down. we know some of the “ big forces ” at work on the global and local outlooks – a once in a century terms of trade event, for example, and a once in a century deleveraging event in major countries. we know that our country is exposed to both forces – the expansionary effects of the rise in the terms of trade, and the dampening effects of a mild degree of deleveraging in our household sector ( and indirect effects of the more intense deleveraging in some other countries ). we also know that the terms of trade change is a large shift in relative prices, which will bring about changes to economic structure. so there is a good deal we can say about the things that are relevant to our future, and economists ’ understanding about these forces will be helpful in making sense of what occurs over time. we simply have to recognise the limits on our capacity to predict their net impact with any precision. this in turn has implications for the way policymakers use numerical forecasts. in the case of monetary policy, forming a forecast is unavoidably part of the process, simply because the evidence suggests that monetary policy changes take time to have their full effect. so we have to use forecasts – but not unquestioningly. we have to form a view about the big forces at work, but also operate with due recognition of the limitations of numerical forecasts. the extent to which policy should respond to forecasts will therefore always have some element of judgement. the conduct of policy over the past few years has exhibited these features. the bank ’ s assessment of the very broad major forces at work has been central. policy was tight in a period in which the economy was very fully employed, confidence was high, the terms of

- expected us data and signs of some progress in europe have lifted sentiment a little since the turn of the year. in january, business surveys for the manufacturing sector ( the so - called pmis ) were up across the globe – in the united states, china, east asia and even in the euro area ( graph 4 ). a similar picture is also evident in the available surveys for the services sector. while it is too early to be confident that this trend will continue, these timely surveys suggest that 2012 started a little better than many had expected. bis central bankers ’ speeches the australian economy i would now like to turn to developments in australia. at the moment, the economy is being influenced by a large number of factors. these include the sovereign debt problems in europe, the changes in household spending patterns, and the softness in the housing market. but this morning i would like to focus on the two factors that are perhaps having the most profound effects. and they are, on the one hand, the investment and terms of trade boom and, on the other, the very high exchange rate. these factors are, of course, interlinked, and in many respects are different sides of the same coin. the investment boom in the resources sector, which the rba has been discussing for some time, is clearly well underway. over the past year, business investment has risen by around 20 per cent and there is more to come. given the plans that have already been announced, the rba is expecting double digit increases in business investment in each of the next couple of years. if this occurs, it would take the ratio of investment to gdp to a record level by a considerable margin ( graph 5 ). it is not an exaggeration to say that this is a once - in - a - century investment boom. it is, of course, occurring at a time when the terms of trade are also at a very high level, with the industrialisation and urbanisation of asia supporting commodity prices and putting downward pressure on the prices of manufactured goods. this boom is having positive spill - over effects to a number of industries, with some of these effects being direct and others being indirect. bis central bankers ’ speeches the indirect effects come through a variety of channels. day to day, they can be hard to see but they do percolate through the economy. in effect, there is a chain that links the investment boom in the pilbara and in queensland to the increase in spending at cafes and