other developments contributing to the lower neutral rates, particularly lower potential growth rates, could be more permanent. global financial influences 8 / 11 bis central bankers'speeches in addition to the neutral rate declining, policy rates in other countries have been set even lower to provide the appropriate stimulus. on top of that, in a number of the major economies, policy is more expansionary than indicated by just the level of the policy interest rate. central bank balance sheets have expanded considerably as the central banks have purchased assets, in large part government debt ( graph 6 ). this program of asset purchases has finished in the us and the uk, but is still ongoing in the euro area and japan. the fact that monetary policy settings are more expansionary in the rest of the world than in australia, both through lower policy rates and balance sheet expansion, puts upward pressure on the australian dollar. capital is attracted by the higher rates of returns on offer here, which is likely to lead to an appreciation of the exchange rate. so, while an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the australian economy, an appreciating exchange rate works against this. to put it in economic terms, there are offsetting income and substitution effects for the australian economy. whether this is positive or negative in net terms for australia is an empirical issue. 10 generally, the evidence suggests that widening interest rate differentials do lead to an appreciation of the australian dollar. so that does counteract the benefit to the australian economy of faster global growth. it is conceivable that unconventional monetary policy may have a larger financial impact than movements in interest rates. 11 that is, the effect of unconventional policy through the exchange rate channel may be larger while the effect in terms of higher output may be smaller. again, it is an empirical issue. central bank asset purchases generate cross - border capital flows from investors seeking higher returns. some of that we see directly in a higher australian dollar exchange rate. but some of those cross - border flows are not quite so obvious. investors often tend to hedge their exchange 9 / 11 bis central bankers'speeches rate exposures to protect their offshore investments from exchange rate movements. as these investments increase there is more demand for such hedges, which causes the cost of hedging to increase. a direct measure of this is the cross - currency basis, which i spoke about recently. 12 for example, the relatively wide yen basis in part reflects the increased capital

parallel with a recovery in profits. moreover, firms continue to reduce debts as part of their balance - sheet restructuring measures. as a result, credit demand in the private sector has continued to be basically stagnant. in view of this, the underlying tone of private banks ’ lending remains sluggish. issuance of corporate bonds and cp has been steady. money stock ( m2 + cds ) grew slower in may compared with the previous month on a year - on - year basis. in this financial environment, corporate financing conditions are easing, and the lending attitude of financial institutions is perceived by firms as less severe. it continues to warrant careful monitoring how these favorable developments in corporate financing environment will affect economic activities.