have also declined significantly. while this partly reflects the winding down of a process of rapid reintermediation that had been occurring as businesses turned to their banks and away from capital markets around the turn of the year, total business funding has slowed. in short, things are happening that suggest a moderation in growth in domestic demand is occurring, signs of which were beginning to appear in the national accounts data released last week. at this stage, inevitably, the extent and likely duration of the moderation remains uncertain. there is not much uncertainty, though, about the need for a moderation. inflation increased over 2007, and in underlying terms reached the highest rate for 15 years or more. it is true that it was boosted by the international rise in oil and other commodity prices, but australia ’ s inflation rate has risen more than most of those in our usual peer group when measured on a comparable basis. it is also pretty clear that strong domestic factors were at work, with growth in local demand at a pace exceeding, by a large margin, any plausible estimate of the economy ’ s long - run potential growth rate for output, at a time when capacity was already tight. had not the rise in the exchange rate occurred over the past couple of years, moreover, the australian dollar prices of energy and other raw materials ( as well as other tradeable goods and services ) would be even higher. so inflation has picked up, and needs, over time, to be reduced. reductions of inflation usually require a period of slower demand growth, and this episode is no different. at the same time as we are seeking this moderation in domestic spending, the rise in resource prices that is occurring courtesy of strong demand abroad has complex effects on the australian economy. since australians pay world prices for their petroleum products, the rising global oil price adds to costs for businesses and consumers. this is inflationary in its immediate impact, though it also acts as a brake on spending on other goods and services, unless people are prepared to reduce saving or borrow to sustain that other spending at previous levels. other things equal, this brake dampens inflation impulses in those other areas. terms of trade - selected countries percentage change, 2002 - 2007 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ chile russia * australia forecast for q3 2008 norway argentina canada south africa mexico turkey indonesia united kingdom france -

%, which, while still high, is certainly manageable. nevertheless, there is still room for greater consolidation because their cost ratios, while not the highest in the euro area, are still too high. profitability remains weak, although there are substantial differences between banks. while there is a need for more consolidation, preserving a diverse banking system, with both large and local banks, remains important. the banks are blaming low rates for their reduced profitability. yes, they are, but at the same time they are also recognising the favourable effects of low rates on improved economic conditions and the need to change business models and reduce costs. over time, the economic recovery will increasingly support bank profitability. the deposit rate will remain low, but the last series of targeted longer - term refinancing operations ( tltros ) that helped banks have already come to an end. the banks benefitted greatly from these operations, which were heavily subscribed. the transmission of the ecb ’ s stimulus measures through the banks is working well at the moment. credit conditions have improved sufficiently, so there is currently no need to renew the tltros. and what about the sequencing of monetary policy normalisation? the current sequencing of monetary policy normalisation makes a lot of sense. there is no number, period of time in months or anything like that which will determine when interest rates go up after the debt purchases end. this will happen based on the ecb ’ s assessment. it will depend on the kind of situation we find ourselves in. and the deposit rate? the deposit rate is the key monetary policy rate. it is the deposit rate that is currently driving monetary conditions and will in the end shape the risk - free asset curve. if the markets were to pick up any change in communication about the deposit rate, it would have the potential to change the policy stance, and we do not want that to happen right now. 3 / 3 bis central bankers'speeches