”. not only are returns on financial instruments low, but yields on the existing stock of physical assets – houses, commercial property, infrastructure assets – are being bid down. some of that search is of course coming from offshore. bis central bankers ’ speeches that ’ s a big part of how accommodative monetary policy works. it prompts substitution towards higher - risk assets ; it raises asset prices, which increases collateral values and makes credit extension more viable ; it improves the cash flows of debtors ; and so on. all those things have been happening in australia. admittedly, the exchange rate, another channel through which monetary policy usually has an effect, is probably not doing as much as it might usually be expected to do in achieving balanced growth. but the thing that is most needed now is something monetary policy can ’ t directly cause : more of the sort of “ animal spirits ” needed to support an expansion of the stock of existing assets ( outside the mining sector ), not just a re - pricing of existing assets. there are some encouraging signs here. nonetheless, if reports are to be believed, many businesses remain intent on sustaining a flow of dividends and returning capital to shareholders, and less focused on implementing plans for growth. any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand. that ’ s actually nothing new. it ’ s pretty normal at this point of the cycle. there is always a period in which people can see that many of the conditions for expansion are in place but aren ’ t yet fully confident it will happen. nor is it confined to australia. the gap between financial risk taking and “ real economy ” risk taking is seen globally at present. it is reasonable to expect that, at some point, this will change. after all : • not only are funding costs low, but banks want to lend and are competing to do so more actively than they have for some years • net worth per household has risen by about $ 120, 000 over the past two years • the community ’ s monetary assets have risen by around 13 per cent – over $ 180 billion – over the same period • productivity improvement in enterprises will presumably continue, and needs to do so. but there are actually a few runs on the board now • the level of gross investment in some sectors is barely above depreciation rates • the population is growing, meaning there will be more demand for housing, infrastructure and consumer goods and services • the dynamic

- to prevent overall demand growth falling short of underlying capacity growth, causing inflation to fall significantly below our 2½ % target - and i remind you it is a symmetrical target - we have had to keep interest rates lower than would otherwise have been necessary, in effect encouraging stronger domestic demand growth, to keep the economy as a whole on track. the risk in this approach, of course, is that we could find it difficult to moderate the pace of domestic demand growth to a sustainable rate as and when the euro recovers. but that ’ s a bridge we will need to cross when we get there. now some of you involved in those sectors that are suffering most from the weakness of the euro would - from your own perspective - like us to go further and try more actively to drive the exchange rate down. if i were in your shoes, i ’ d be tempted to argue that myself. euphemistically it is suggested that we should “ pay more attention to the exchange rate ” - than, as i ’ ve explained, we do already. in practice what that would be likely to mean in our present situation is substantially lower interest rates : the intended effect would be to stimulate external demand, but it would inevitably also involve further stimulus to domestic demand. in effect, it implies that we should acquiesce in increasing overall demand pressure leading inevitably to faster inflation. that might conceivably even provide some relief to the suffering sectors in the short term. but increasing demand pressure, including labour market pressure, and accelerating inflation would - as we ’ ve repeatedly seen in the past - ultimately need to be brought back under control, involving a more abrupt tightening of policy. that frankly would not do the suffering sectors themselves much good at least for very long - and it would have a potentially serious destabilising effect on the economy as a whole. that is precisely what we are trying to avoid. the more hopeful news is that we have recently seen strong signs of recovery - of both economic activity and exchange rates - in a number of emerging markets and transition economies. and we are seeing a strengthening of domestic demand and of output in the eurozone, which may help the euro to appreciate. to the extent that these trends persist, it will help to ease the exceptional pressures on the most internationally - exposed sectors, and contribute to a better balance within the uk economy. but it will need to be accompanied by corresponding moderation of the growth of domestic demand - after the offsetting stimulus of a