a flow on of international forces. they were not mainly a result of local factors. but it is appropriate, in our judgment, to foster confidence to the extent we can during periods of global stress such as we have been experiencing. despite those actions, a financial system such as ours cannot be entirely insulated from these global events and, inevitably, the australian financial system has been affected to some extent. the rise in the wholesale cost of term funding has meant that many non bank and some bank lenders have had to slow the growth of their businesses. the closure, more or less, of securitisation markets for the time being also has made life much more difficult for those lenders which relied heavily on that avenue of funding. capital market raisings are much more difficult for some corporates as well, and many of these entities are turning to their bankers. by and large, the major banking institutions have been able to provide support for sound borrowers, and have stepped into the gap left by the withdrawal of funding from the capital markets. they have been able to do this because of their own balance sheet strength, something which is clear from the analysis in the bank ’ s recently released financial stability review. while some of their customers have been excluded from capital markets of late, banks have themselves been able to access segments of the capital markets in sufficient quantity to keep their balance sheets expanding. this has come at a time when wholesale funding costs have been rising by more than the official cash rate, and that has been passed on to end borrowers, while conditions on lending for some borrowers have tightened in response to higher perceived risk. but this outcome is preferable to the alternative of lending drying up. at present, the international environment remains very difficult. the us economy is experiencing very subdued conditions, as the weakness that had for some time been confined to the housing sector has spread to other areas over recent months. losses incurred by major international financial institutions associated with previous risky lending have continued to come to light, even during this week. valuing certain classes of assets remains very difficult and some quite sound assets appear to be priced currently at less than their likely underlying value. a process of deleveraging is continuing among hedge funds and other complex financial vehicles, as the retreat from risk by their lenders forces a winding in of positions. while all this has been occurring, participants in financial markets have understandably remained very nervous, and day to day volatility in a range of markets has been much

of the economy by region, those differences, if anything, narrowed during 2007. unemployment rates in the big south eastern states, for example, were at generational lows on the most recent reading. the pace of demand growth in 2007 well and truly exceeded any plausible estimate of the rate of growth of the economy ’ s supply potential. under these demand conditions, inflation increased. having apparently moderated a little late in 2006 and early 2007, it began to show higher readings around the middle of 2007 and by the end of the year had reached about 3½ per cent in underlying terms. measured by the cpi, the year ended inflation rate was 3 per cent, but as is well understood, the next figure is likely to be around 4 per cent. faced with this combination – very strong demand growth in what was already a pretty fully employed economy, and inflation moving higher – the reserve bank board, when discharging its monetary policy duties, could draw no other conclusion than that growth in demand needed to slow. the board had tightened monetary policy on three occasions during 2006. it then stayed its hand for a period in the first half of 2007, as inflation results available at that time suggested some moderation. but as the trends of 2007 and the likely risk they posed to longer run performance emerged, the board tightened policy further during the second half of the year and in the early months of this year. the cash rate was raised on a total of four occasions, with the aim of achieving a moderation in demand, which is an obvious necessary condition for reducing inflation over time. in reaching these decisions, the board naturally took careful account of the unfolding events in global financial markets. i will not recount the details of those events again now – i and many others have talked at length about them before. i am sure we will return to them in question time. as a daily participant in financial markets, the reserve bank was in a position to observe developments very closely. our senior officers have been in frequent contact with all the significant financial institutions operating in australian markets, with our colleagues at apra and other regulatory agencies, and with our counterparts abroad. the rba board spent considerable time at its meetings examining market developments and considering their possible implications. the rba responded to the unusual demand for liquidity on a number of occasions, and made early changes to its practices for open market operations to accommodate dealing in a wider range of assets and over longer terms. these market pressures were, and remain, overwhelmingly