line with the forecasts, further tightening of monetary policy would be necessary at some point, the recent flow of data had not added any urgency to the need to adjust policy. accordingly, the cash rate continued to be held steady. at the time of the july meeting, global economic growth had eased, and the downside risks stemming from the european debt problems looked more significant. in australia, households remained cautious and the housing market was soft. also, it now appeared that the slow recovery in coal production would mean that earlier gdp forecasts for 2011 would not be met. nonetheless, the medium - term outlook for the australian economy remained strong. in these circumstances, the board continued to hold rates steady, noting that the cpi outcome to be published in the next month would provide an update on inflation. the state of the global and domestic economies had not changed much by the time of the august meeting, but the cpi outcome for the june quarter again surprised on the upside. price increases for a range of manufactured goods were larger than expected in light of the appreciation of the exchange rate and the ongoing caution among consumers. there was the possibility that the slower growth in productivity that had been evident for some years was pushing up unit labour costs at a pace faster than was consistent with the inflation target. at the august meeting the board therefore discussed whether there was a case to tighten monetary policy further. the general case to do so was that the economy was continuing to operate with relatively little spare capacity, and the staff forecasts showed inflation rising above target during the forecast period. on the other hand, activity in parts of the non - mining economy was subdued and downside risks to the global economy had increased significantly due to the volatility in financial markets. also, the softness in credit demand and the high exchange rate pointed to financial conditions exerting a reasonable degree of restraint. these considerations led the board to conclude that it would be prudent to continue to hold rates steady. summarising all this, the general pattern that has emerged over the past year has been as follows : first, the effects of the mining boom have turned out to be stronger than expected a year ago. the terms of trade are noticeably higher and forecasts for national income and mining investment have been revised up over the year. second, despite this strength in the mining sector, overall economic growth is turning out to be weaker. the forecasts published earlier this month reduced growth in gdp for 2011 to 3¼ per cent, versus 3¾

globalised nature of markets. the discussion will also need to pay due regard to the potential for other consequences of changes to practice in this area, including the possibility that private entities become so confident that liquidity risk has effectively been removed that they end up taking more risk of other types. that could leave both themselves and their central banks in an awkward position at some point down the track. so in parallel with ongoing development of liquidity arrangements by central banks, there will need to be a focus in the supervisory community and the banks themselves on liquidity management. conclusion international financial events over the past nine months have been a source of considerable instability. risk that was always in the economic environment has belatedly been recognised. the ensuing process of assessing and disclosing losses, finding new capital and de leveraging has been very difficult. matters have not been helped by the opacity and complexity of some of the financial instruments involved, and the associated problems in valuing them. for market participants and policy makers alike, this environment has been challenging indeed. those of you in the markets are dealing with heightened volatility and uncertainty. policy makers, meanwhile, are working hard to stabilise the present international situation. in some countries, especially the us, that involves being prepared to take measures quite aggressively, in an effort to avert a cumulative spiral of declining asset values and deteriorating creditworthiness feeding back on itself and doing great damage to the economy. in other countries, where financial strains are also occurring though not always to the same extent, it has thus far involved significant changes to liquidity management, while balancing the financial risks against other macroeconomic risks in an effort to foster long run stability. in all countries, though, policy makers are also keeping an eye out for the potential low probability, but high cost, downside events that could emerge. it looks as though the environment will remain quite challenging for us all for a while but the strength of the australian financial system is, for australia, a good basis for meeting the challenge.