consumers. people will base their decisions on factors like price, quality and the cost of production. if it ’ s a competitive market, we ’ d expect it to have certain characteristics, such as that : other things equal, a lower price means more demand ; producers compete to offer the product at the lowest price they can ; and the price mechanism promotes efficiency by guiding resources to their best use. in practice, no market will meet those conditions perfectly. but the card - payments market has some particular qualities that make it very different from the stylised description i ’ ve just given. first, the card payments market is subject to network externalities, which is another way of saying that the cost - benefit decisions made by the various players are highly interdependent. the value of the service i get from being part of a card network depends, in part, on the size of the network. cardholders value having a particular card in their wallet because they know the card is widely accepted. and merchants value the capacity to accept a card because it ’ s widely held. this aspect of the market adds a level of complexity to the pricing strategy, because the suppliers of card services will want to take those externalities into account. they have an incentive to adopt pricing strategies that promote the size of their networks. the second difference is that card payments services are a joint product. the purchaser of the service, in any given transaction, is not the only one who benefits from it. when a card is used to make a payment, it delivers a service jointly to both the payer and the receiver of the funds. thirdly, the card payments market, particularly in the credit cards space, has evolved in such a way as to have a very unusual characteristic. that is, that the decision - maker in a transaction – the person who decides which payment method to use – is generally not the person who is on the receiving end of the price signal. to be specific, it is typically the purchaser who decides whether to use a card ( and which card to use ), but it ’ s the merchant who, in the first instance, pays the fee associated with that decision. so, in a world where cards are widely held and widely accepted, the effective demand for the service is determined mainly by the cardholders, while the price is charged to the merchants. this is where, in the four - party card schemes, interchange fees play a key role, because they are typically passed on to

medium - term goal for bis central bankers ’ speeches inflation, provided the community can understand their temporary nature and expectations of ongoing inflation remain well - anchored. accordingly, the view of the board at the recent meeting was that while the impact of the floods on the short - term path of output and prices would be quite substantial, monetary policy should not respond to those effects. likewise, while the recovery efforts may add a little to aggregate demand over the latter part of 2011 and 2012, those effects should be manageable. while we could not assess the impact of cyclone yasi at the board meeting, our assessment of the medium - term outlook is not very different now. the outcomes for inflation in the latter part of 2010 were quite moderate and a little lower than we had thought they would be at the time of the last hearing. to what extent this represents a genuinely lower trend, as opposed to noise, is, as always, difficult to say. there would appear to be some association between consumer caution, reports of widespread discounting in the retail sector and the very high exchange rate. if that connection is in operation then the question arises as to how long such cautious behaviour might continue – and this is one of the uncertainties to which we point in the section on “ risks ” in the outlook chapter of the statement. there are of course other uncertainties as well. but stepping back, underlying inflation has fallen by a substantial amount from the peak in 2008. it is worth recording that a combination, on the latest figures, of a 5 per cent unemployment rate and an inflation rate clearly “ in the 2 ’ s ” is a pretty favourable one by the standards of recent decades. turning finally to monetary policy itself, as a result of the adjustment to the cash rate made in november, and the changes made by financial institutions to lending rates, interest rates being paid by borrowers are a bit above average compared with the past 15 years. household credit growth is quite modest and business credit is still declining, as firms continue to consolidate balance sheets and, in the case of larger companies, to access capital markets directly. reports suggest that there is some easing of lending conditions in some areas but my sense is that, generally, lenders remain quite cautious. the exchange rate is at peak levels for the floating rate era. this is not especially surprising given the level of the terms of trade, but nonetheless it is exerting dampening pressure on the traded sector outside of the resources sector. so, overall, financial conditions