the market expectations. currently the market assumes that the cash rate is likely to remain unchanged for at least the next 12 months, and then rise only very slowly beyond that. the forecasts also assume that the exchange rate and oil prices remain at their current levels. historically, we have found that assuming those variables remain constant is at least as good as any other forecast, while recognising that they are highly likely to change. in saying that, it is worth noting that the exchange rate has moved within a fairly narrow range over the past two years. these small variations have probably not been a major factor in your decision - making as cfos. in contrast, i would expect that the 20 per cent depreciation of the australian dollar in 2014 – 2015 did have a material impact on decision - making at any business with an export or import - competing focus. other developments in financial conditions can affect the forecasts too. one example is developments in money market rates. in the smp, we document the recent rise in money market interest rates in the us, particularly libor ( graph 1 ). there are a number of explanations for the rise, including a large increase in bill issuance by the us treasury and the effect of various tax changes on investment decisions by cfos at some us companies with large cash pools. 3 this rise in libor in the us has been reflected in rises in money market rates in a number of other countries, including here in australia. this is because the australian banks raise some of their short - term funding in the us market to fund their $ a lending, so the rise in price there has led to a similar rise in the cost of short - term funding for the banks here ; that is, a rise in bbsw. 4 this increases the wholesale funding costs for the australian banks, as well as increasing the costs for borrowers whose lending rates are priced off bbsw, which includes many corporates. however, the effect to date has not been that large in terms of the overall impact on bank funding costs. thus far, it has not been a consequential development from a forecasting point of view. it is not clear how much of the rise in libor ( and hence bbsw ) is due to structural changes in money markets and how much is temporary. in the last couple of weeks, these money market rates have declined noticeably from their peaks. we will continue to monitor how this unfolds in the period ahead. the outlook

debts were this large, or even much larger. they were mostly, however, war - time precedents, and wars have tended to be inflationary for the combatants. likewise, largescale expansions of central bank balance sheets have usually been seen as a fairly sure way of debasing the value of a currency. so at present, we have the unusual situation where some, who look at the prospective deficits and debt burdens, combined with ‘ unconventional ’ monetary policy measures, worry about high inflation down the road, even as others worry about the possibility of deflation over a shorter time horizon, as a result of large - scale overcapacity. logically, subject to one or two important assumptions, there must exist a path that avoids both these unpalatable alternatives – deflation and inflation. finding that path is the challenge for policymakers around the world over the next several years. faced with a large downturn like this, it was the right thing to do to allow budgets to go into deficit. over time, though, there will obviously need to be fiscal consolidation. this will be easiest where the fiscal measures taken were temporary : it would be a matter mainly of not repeating the measures. where more permanent measures were enacted, it will be more of a hard grind to get onto the path of sustainability. in some countries, moreover, the legacy of the excesses of the earlier part of this decade, and of the steps needed to cope with their subsequent unwinding, is likely to be quite persistent. some major country governments have assumed, one way or another, a significant part of the obligations associated with earlier poor decisions by lenders and investors. moreover, the level of potential output in some economies may have taken a step down, which will make the path back to fiscal sustainability more difficult to reach. in the countries concerned, there was no alternative to these actions ; inaction would have been more costly. nonetheless, all of this suggests that, in those countries, constraints on economic policy are likely to last for some time. the higher debt burdens will limit the extent to which worthwhile structural spending levels can be maintained for other things – like in health, education, urban infrastructure and so on. moreover, the capacity to respond with fiscal policy to another economic downturn, should there be one, would be much more limited. over time, these constraints will tend to become more apparent. of course they might be disguised for a while under conditions of higher inflation