glenn stevens : recent issues for the conduct of monetary policy speech by mr glenn stevens, deputy governor of the reserve bank of australia, to the australian business economists and the economic society ( nsw branch ), sydney, 17 february 2004. * * * thank you to the abe and the economic society for putting on such an enjoyable occasion and inviting me to speak. i don ’ t intend to say much about current economic conditions or the short - term outlook. the bank has just released its statement on monetary policy, and there is no end of discussion at this time of year in various conferences about what may lie ahead. instead, i want to make some observations about several issues which have been important in the conduct of policy over the past couple of years. these issues of principle are worth clarifying as they are likely to be of more enduring importance than comments about the current state of the economy. background the past two or three years have seen some highly unusual circumstances for the conduct of monetary policy. internationally, we saw in 2001 and 2002 the weakest economic conditions in the major countries as a group for about twenty years. several of them encountered recession - and recovery tended to be rather halting, which seems related to the unwinding of the share market bubble and associated excesses in the us and elsewhere. it has also been a period of very low and declining inflation, as conventionally measured by cpis. the long disinflation which began in the early 1980s has resulted in price stability in most countries, and the possibility of inflation falling too far - becoming deflation - was openly talked about around the world last year in a way which had not happened in half a century. a result of all of this has been that interest rates in the world ’ s key financial centres have fallen to exceptionally low levels. at present, the average short - term interest rate in the ‘ big three ’ economies is 1 per cent, the lowest in a hundred years. there have also been major changes in exchange rates over the past year or two. the us dollar, formerly very strong, has weakened considerably against the euro and other major floating currencies ; most asian currencies have depreciated against other currencies roughly pari passu with the us dollar. through all this, the australian economy has to date maintained a pace of growth envied by most others, in the face of some pretty unfavourable shocks. it is the first time anyone can recall the us having a

the effect of the improvement in macroeconomic conditions and asset prices 4 / 6 bis central bankers'speeches resulting from our monetary policy measures shows that the overall impact of our measures on bank profitability was positive. 14 let me also underline that there remains ample room for a large part of the financial sector to improve profitability by increasing efforts to improve operational efficiency via organic costcutting : euro area banks ’ cost efficiency has not improved since 2010 and, by standard metrics, compare unfavourably with many of their international peers. 15 finally, what about the effects on institutional investors? our latest financial stability review, which was published today, states that over the past few years some institutional investors, including insurance corporations, pension funds and investment funds, have shifted their asset allocation from higher to lower - rated debt securities. 16 such developments need to be closely monitored. to mitigate their risks, these institutions may have to adapt their business models, for instance by continuing to reduce their reliance on guaranteed - return schemes. 17 conclusion let me conclude. the macroeconomic environment is improving. the monetary policy measures put in place in recent years have proven to be effective at sustaining a resilient recovery that is increasingly broad - based across countries and sectors. this recovery in turn contributes to greater financial sector resilience. the breadth of our monetary policy measures and the length of the time they are in place are necessary for achieving our objective of price stability. these policy settings have been made possible because the financial system is more resilient than in the past. today we have a suitable – and active – macroprudential framework to address potential negative side effects. this, together with stronger banks and stronger supervision, has enabled us a longer period of low interest rates unmarked by a build - up of financial stability risks. nonetheless, we remain vigilant. when we introduced unconventional policy instruments in order to secure a return of inflation towards our objective, we were aware that those new instruments could result in somewhat more pronounced side effects than conventional instruments. these side effects have remained contained, but we take them into account in the formulation of our policy, in the sense that we try to minimise them, without prejudice to our ability to achieve our objective. and this is reflected also in the logic underpinning our forward guidance about the sequencing of the withdrawal of monetary stimulus. indeed, as i said in my speech at the ecb watchers ’ conference, 18 in a multi - country monetary union such as