of the year, but suggest that it has neither been particularly pronounced, nor showed signs of being long - lived. risks and policy considerations it has become much better understood in recent years that once a coherent framework for monetary policy is in place, the regular policy decision is essentially a matter of responding to the changing balance of risks to the outlook. the rba ’ s board certainly has had a busy time over the past year or more evaluating and deciding how to respond to the evolving balance of international and domestic risks. it takes a lot more work than you might think to leave rates unchanged for fifteen consecutive months! in the middle of last year, it looked as though the international economy was returning to stronger conditions, and australian domestic demand was growing very strongly indeed. to foster an inflation outcome consistent with our medium - term target, we believed that it would be prudent under such conditions to return interest rates to normal, or ‘ neutral ’, from a relatively expansionary setting. two initial steps were taken, and the likelihood of further steps clearly signalled. but in the event, the process did not continue, because the world economy began turning out differently to what we had assumed. by the end of 2002, it was clear that any thought of near - term tightening could go off the agenda for a while. the world economy had clearly lost some momentum, and for the time being, this meant that a steady interest rate structure would probably be associated with achieving our policy objectives. that remained the story through to the middle of 2003, as the iraq war came and went, most international data looked on the soft side, the drought continued, and financial market sentiment waxed and waned. the outlook for australia was for moderate growth - quite a good outcome in the circumstances - but our feeling was that the risks stemming from international developments were tilted to the downside. inflation, if anything, looked a little higher than had been expected, although our judgement was that in the medium term, it would still turn out to be consistent with the target. that was a macroeconomic outlook which certainly did not, in my view at least, amount to an obvious case for monetary policy to be noticeably easier than was already in place. a reasonable case could be made that policy should be easier than neutral - but it already was, and had been for some time. our conviction that the level of interest rates was exerting stimulus to the economy - a conviction strengthened when we looked at the demand for credit and the behaviour

income. so the australian community, by having access to capital markets, and facing macroeconomic policy settings which remained on the expansionary side, was able to continue to increase its spending at a very strong pace, even though income growth was impaired by international events. this involved declining rates of saving out of current income, and some extraction of accumulated equity from the dwelling stock. generally speaking, to have that flexibility is a good thing - with the proviso that, as with all good things, we don ’ t want to over - indulge. we can anticipate that, over the coming year, the two factors weakening overall performance over the past year will not recur, and indeed some reversal of these effects is likely. it is widely acknowledged now that there will be a strong recovery in farm production. the prospect of some continuing improvement in international conditions means that the downward trend in non - farm exports should bottom out, and a recovery begin. at the same time, domestic demand growth should moderate a little. capital spending by firms will probably continue to rise, but not as quickly, on current indications, as it has over the past year. some decline in dwelling construction activity has occurred, although this looks smaller than earlier thought. consumption spending looks likely in the near term to continue to benefit from steady growth in incomes, high levels of confidence and the higher and more accessible wealth available to households. if this outlook is correct, growth in the economy has probably already slowed as much as it is likely to. the year - ended growth rate of non - farm gdp will decline for another quarter as an earlier very strong quarter drops out. but the pace of expansion through the second half of 2003 is probably going to be at least as good as it was in the first. if the global economy continues on its present track, australian growth should clearly be picking up by the first half of next year. inflation will be pushed down a bit by the earlier exchange rate appreciation for a while, but is still thought likely to be about 2½ per cent in the medium term, based on the usual assumptions about oil prices, exchange rates and interest rates, and the above growth outlook. this picture is much as was described in our statement on monetary policy on 11 august. since that document was published, it is fair to say that the downside risks to the global economy have retreated further. most recent data on the australian economy also seem consistent with a moderation in non - farm growth in the first half