glenn stevens : still interesting times address by mr glenn stevens, governor of the reserve bank of australia, to the chamber of commerce and industry ( western australia ) and the chamber of minerals and energy ( western australia ) corporate breakfast, perth, 7 september 2011. * * * it is very good to be with you this morning. in the process of deciding a title for this address, i recalled that three years ago i was talking in public addresses about the times being interesting, perhaps a little too interesting. that still seems to be the case, hence the title. as you know, yesterday the reserve bank board met here in perth. the board reviewed the international and local information to hand since its last meeting, and decided once again to leave the cash rate unchanged. the reasons for that decision were given in the statement released following the meeting. more information on the nature of the discussion and considerations the board took into account will be published in the minutes of the meeting, two weeks from yesterday. i do not want to dampen any of your undoubted eager anticipation for what may be contained in those minutes. what i will do is say a little more about the sequence of decisions the board has taken over recent months. to do that in appropriate context, it is worthwhile first recounting the framework for monetary policy that has been in operation since the early 1990s and that continues to guide the decisions of the board. so i will say something about that. then i will describe how the flow of recent events, viewed through that framework, has had a bearing on decisions. the framework for monetary policy the framework for monetary policy is a medium - term, flexible inflation target. it seeks to achieve a rate of increase in the consumer price index of between 2 and 3 per cent, on average, over time. this arrangement has a fair bit of history now. the reserve bank began to articulate it in the early 1990s and it has been formally agreed between successive treasurers and governors, in published statements, beginning in 1996. 1 the “ on average ” specification allows the bank to take account of the fact that it cannot finetune inflation over short periods, and of the obligation to promote, insofar as monetary policy can, full employment, which is another of the bank ’ s charter obligations. having a numerical goal takes account of the importance of inflation expectations, and seeks to provide an anchoring point for them – which is a critical function of any monetary policy regime. it also provides a focal

be conducted by the national authorities, following centrally set mandates and arrangements. as you can imagine, the work ahead over the coming months will be very intense. having to assume supervisory powers in scarcely one year will make great demands in terms of organisation. specifically, several groups made up of staff from the ecb and the national authorities have been set up in frankfurt and are pushing ahead with the extensive groundwork. currently, the focus is on defining the scope of conduct which will determine the internal organisation of the single mechanism, on developing a supervisory manual and on designing an exhaustive analysis of the situation of each of the banks that will be directly supervised by the single mechanism. this analysis of banks ’ balance sheets is three - pronged : i ) an evaluation of the risks for supervisory purposes, ii ) an analysis of asset quality and iii ) a stress test to be conducted in collaboration with the european banking authority. the aim is to obtain a score for each bank as a joint result of the three parts of the analysis. on this basis, specific supervisory actions will ensue, including where appropriate the requirement of additional capital for banks that do not meet the solvency requirements set. it is still somewhat premature to specify the details of the exercise. i would, however, like to stress the importance of the asset quality review – which focuses on substantiating their appropriate valuation in accordance with accounting principles – as a centrepiece of the analysis of the banks. the study will comprise a wide - ranging review of the banks ’ balance sheets as at 31 december 2013, which will include credit and market exposures, on - and offbalance sheet assets, and domestic and international exposures. all assets are potentially subject to review, although on the basis of a risk - based approach, the asset quality analysis will focus on those balance sheet items of the various banks that are considered most important under the objectives of the exercise. demanding capital thresholds have been set for this component of the exhaustive analysis. specifically, the reference value has been set at 8 % in respect of top - quality capital ( cet1 ) under the definition of the capital requirements directive and regulation that incorporate the basel iii accord into european legislation. this 8 % threshold is equivalent to adding, to the regulatory minimum of 4. 5 %, the capital conservation buffer of 2. 5 % and an additional bis central bankers ’ speeches 1 % to reflect the systemic importance of the significant institutions that will be overseen by the single supervisory mechanism. finally,