this was feeding, via rising cost pressures, into inflation outcomes in a wide range of countries. as a result, there was a general trend towards tightening monetary policy through asia and latin america. domestically, the effects of the floods were becoming clearer in the data, and liaison with mining companies was starting to point to a more protracted recovery in production. economic indicators were mixed : business conditions were around average, the outlook for investment was strong, unemployment was holding steady at a low level but retail sales had been growing only modestly. financial market uncertainty had lessened following further measures taken by european governments, though social unrest in the middle east and north africa was keeping markets on edge. against this background, the board saw little need to change the level of interest rates at its february, march and april meetings. in may, the board again held the cash rate steady. however, the cpi outcome for the march quarter was higher than expected and inflation forecasts were scaled up somewhat. global economic growth was expected to continue at an above - trend pace, notwithstanding the disruption to global supply chains caused by the japanese earthquake in march ; commodity prices were higher than earlier expected ; and global inflationary pressures had risen. therefore, while the board saw the existing mildly restrictive stance of monetary policy as appropriate for the time being, its assessment was that if conditions evolved in line with the outlook, another rise in interest rates would likely be required, at some point, if inflation was to remain consistent with the medium - term target. by the june meeting, signs were emerging that economic growth in many developed economies had lost some momentum. increased financial volatility, as the debt problems within europe spread, added to the downside risks. growth in china and most other parts of asia, however, remained a bright spot. the march quarter national accounts suggested that the impact of the floods on queensland coal production had been significantly larger than expected and the timing of the recovery in production was pushed out further. while the outlook for mining investment was very strong, non - mining investment was looking softer and households were showing more signs of caution, with confidence declining ; households ’ perceptions of their own personal finances over the coming year were particularly weak. it was also more apparent that employment growth had slowed, though this appeared to be taking place against a background of slowing population growth, and unemployment was holding steady at a relatively low rate of around 5 per cent. bis central bankers ’ speeches while the board remained of the view that, if conditions evolved in

ric battellino : the reserve bank of australia ’ s thinking on the economy over the past year address by mr ric battellino, deputy governor of the reserve bank of australia, to the economist ’ s bellwether series : australia, sydney, 23 august 2011. * * * over the past year, the australian economy has been subject to a number of strong, often countervailing, economic forces : strong demand for commodities, rising global inflation, global financial market instability, consumer caution, slower population growth and slow productivity growth. the economy has also been affected by severe weather events. today i would like to look back over the year and review how these forces have shaped the economy and the reserve bank ’ s thinking on monetary policy. if we start by casting our minds back a year ago, you will recall that the bank at that time was starting to contemplate whether it should move from a relatively neutral setting of monetary policy to one that was slightly restrictive. the global economy was growing at a solid pace, though with clear downside risks. domestically, a rebalancing in demand, from public to private spending, was starting to take place ; the outlook for business investment was particularly strong. employment was growing very quickly, unemployment had fallen back to just above 5 per cent, and inflation was forecast to reach the top end of the target range over the subsequent couple of years. the board ’ s assessment of these circumstances was that, if they continued and the economic outlook evolved as expected, there would be a case to raise interest rates a little at some point. however, the uncertainty in global markets, due to the spread of sovereign debt concerns beyond greece, was seen as posing downside risks to the global economy, and consequently to australia. also, the strong exchange rate and weak demand for credit pointed to financial conditions perhaps being somewhat tighter than might be indicated simply by reference to interest rates. these considerations were seen as reasons for caution and, in the event, the board held interest rates steady through to november 2010. by the november meeting, financial market volatility had declined and the chinese economy was continuing to grow strongly. earlier downside risks to global growth had diminished somewhat and it was becoming clear that global gdp would record a very strong increase for 2010 as a whole. domestically, employment had continued to grow very quickly. while there were significant differences in the performance of various sectors of the economy, overall it appeared that resource utilisation in the economy was tightening. the