growth have gone. as discussed earlier, there are now signs of slowing domestic demand, some of which may be in response to the tightenings that have already occurred. other things being equal, this should be helpful in containing inflationary pressures. other developments, principally the lower exchange rate, will act in an expansionary direction, and potentially put upward pressure on inflation. it will be a difficult time for reading and forecasting the domestic economy, and all this will take place against the backdrop of an international economy dominated by the uncertainty of the unfolding events in the united states. markets, as always, will be looking for guidance. the more thoughtful will appreciate the complexity of the situation, the less thoughtful will be expecting to be told the “ formula ” that we are using. unfortunately, there is no “ formula ” other than the guiding principle of the inflation - targeting regime. this means that we will be assessing the outlook for inflation as judged by the factors which form the basis of our forward - looking approach to monetary policy. growth in demand and output, and the extent to which that places pressure on the economy ’ s capacity, are clearly important. we judge this by examining all the available monthly and quarterly time series data on economic activity, including those which give an impression of intangible factors like “ confidence ”. we monitor trends in commodity prices, wholesale prices, and wages, as well as the cpi and the various measures of underlying inflation derived from it. the wages data may be particularly important in the year ahead, given the difficulties in interpreting price indexes. we have to allow for structural changes - such as the increased competitive pressure in goods markets. this has been an important ingredient in maintaining downward pressure on many prices, and should be helpful in negotiating the introduction of the gst. inflation expectations are important - since it is the anticipation of price rises that drives many decisions. we need also to consider the financial side of the economy - the expansion of credit, trends in asset markets and the extent of risks which may be building up there. we then complement this essentially domestic analysis with an appreciation of what is happening in the international environment in which australian producers and consumers make their decisions. we can not afford to ignore the world price level, world interest rates, or the variable which connects both of them to the australian economy - the exchange rate. changes in the price of imports in foreign currency terms can have a large impact on domestic inflation as the opec oil price rises of the 1970s showed.

direction of more liberal trade policies. change is already occurring in that the western policy establishment is no longer pushing emerging market economies to move quickly to full capital account convertibility. as recently as october last year the imf, at its annual meeting in hong kong, was hoping to get its members ’ endorsement of a change to its articles to make it easier for it to encourage countries to adopt full convertibility. this proposal was not put forward at the 1998 annual meeting in washington because it was clear that it would not get support. there also seems to be greater tolerance for countries which have a generally outward - looking policy framework, but which have put in place some impediment to very short - term capital movements. i refer here to chile ’ s deposit requirement on foreign borrowing and to singapore ’ s and taiwan ’ s restrictions on their banks lending domestic currency offshore. the more important task is to get on with the job of improving the international monetary system, with the specific aim of reducing the degree of instability. some of this is the job of the emerging market countries, and in the first instance involves increasing disclosure by these countries ’ governments, companies and banks. as well as making markets better informed, and better able to judge the risks they are taking, the aim here is to make some progress on reducing the previously opaque links between governments, banks and companies, or, in other words, to improve governance. in addition, there is a lot of work to be done to bring the supervision of financial institutions up to standard - a task which will take a lot of personnel, training and time. these changes are extremely important and require a lot of effort on the part of the emerging market countries. they also mean that a lot of time - honoured ways of doing things will have to be replaced. this is bound to meet opposition, and it will require political courage as well as economic expertise to achieve results. it will be made a lot easier if the developed economies are also seen to be examining whether there are aspects of their regulations that are contributing to the instability of the international system. the most obvious reform here is to do something about the extent to which current regulations allow excessive leverage in financial markets. the immediate focus should be the close inter - connections between hedge funds, investment banks and commercial banks. the hedge funds have become the privileged children of the international financial scene, being entitled to the benefits of free markets without any of the responsibilities. our reconstruction of the transactions that hedge funds undertook in australia in june