inflation either does not depart too far from target, or returns to target in cases where it has already moved. that is how an inflation target works, and it would do so even if the reserve bank's legislated mandate was expressed solely in terms of price stability. but the mandate in our act also encompasses full employment and the welfare of the australian people. these things are not in conflict with an inflation target. rather, they inform how that inflation - targeting regime operates day - to - day. they are relevant to the choices made about how quickly to return to target. the role of an inflation - targeting regime for monetary policy in supporting growth can be well illustrated by events in the australian economy over the past decade or so. during the build phase of the mining investment boom, there was a great call on australia's production capacity to get all the new mines built. this meant that, unlike many other countries, australia reached a point of having little spare capacity quite soon after the global financial crisis peaked. so there was a period where it was appropriate to set the cash rate a bit higher than the levels reached in the immediate aftermath of the crisis. since the peak of the mining boom, though, it has been appropriate to cushion the drag on growth as the terms of trade and mining investment declined. that is one of the reasons why monetary policy has been set to support growth in recent years. we expect mining investment to bottom out in coming quarters, as the last of the large lng expansion projects completes. after that, it will probably increase a little, as resource firms invest to maintain their production capacity at current levels. the scale of that ‘ sustaining investment ’ is nothing like that of the boom of the past decade or so. but the important point is that mining investment will no longer be dragging on growth. while there is spare capacity remaining, it is important for policy to support above - trend growth and work that spare capacity down. this raises the question of what trend might be and how we would know. just waiting until you see wages growth or inflation pick up would leave policymakers in the dark about how quickly they are moving towards their goals, or even if they are doing so at all. instead people use a range of different rules of thumb to assess how growth is tracking relative to trend, or ‘ potential growth ’. some of these are trickier to use in practice than others. for example, some estimates hinge on an estimate of feasible productivity growth. but these will

guy debelle : the australian bond market address by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, to the economic society of australia, canberra, 15 april 2014. * * * i would like to thank ivailo arsov, mathew brooks and karl stacey for their assistance in preparing this speech. thank you for inviting me to talk at the economic society here in canberra. today i am going to walk you through the current state of the australian bond market. the bond market plays an important role in the financial structure of the australian economy and it is timely to examine its structure and functioning with the financial system inquiry underway. i will start today by providing an overview of the composition of the australian bond market and how this has changed in recent years. then, i will discuss more recent developments in the market since the start of 2013, focusing particularly on two trends that emerged last year : the nascent signs of deepening of the domestic corporate bond market and the pick - up in securitised issuance. i will also talk a little about the prospect for market - based finance, of which bond issuance is an important part, playing a larger role in the future than it currently does. shape of the australian bond market the evolution of the australian bond market over the past several years has been shaped to a large extent by the fallout from the global financial crisis. prior to the crisis, the market comprised mainly bonds issued by the australian banks and asset - backed securities. together these accounted for just over half of the outstanding stock of australian bonds in june 2007. bonds issued by the public sector were a relatively small share of the market, at 16 per cent of the total outstanding ( table 1 ). overall, the size of the bond market in mid 2007 was equivalent to around 84 per cent of australia ’ s annual gdp. in the subsequent seven years the stock of australian bonds on issue has increased to reach the equivalent of nearly 100 per cent of gdp. the increase has mainly been the result of debt issuance by the commonwealth and state governments to finance their budget deficits as they sought to support economic growth through the crisis. bank bond issuance has slowed down in the last couple of years as australian banks have sought to shift towards more deposit funding. however, the stock of bank bonds on issue is significantly higher than it was just before the start of the global financial crisis, reflecting the strong issuance of bank bonds in 2008 and 2009 as the financial system was