this important area and do not want to lecture the federal and state governments on this issue, which i know is already absorbing a lot of their attention. this process of slowing demand and expanding capacity has been going on for several years, but it has not prevented some general upward pressure on producer and consumer prices. this was brought home to the public with the publication of the june quarter cpi. the increase of 4 per cent over the year to the june quarter made headlines, even though many observers were quick to point out that more than half of the june quarter increase was due to petrol and bananas, the latter influence giving the cartoonists of australia great opportunities for mirth. they were correct to downplay these two influences which, in all probability, will either reverse or revert to zero in the coming quarters. but there is also a danger in simply taking out the two fastest growing components and looking at the rest of the cpi basket. at the bank, we tackle the problem of lumpy, and possibly one - off, price movements by looking at various measures of underlying inflation. our preferred measures show that underlying inflation is running slightly below 3 per cent per annum. this has picked up moderately since the start of the year, after a period when it had been fairly stable at around 2½ per cent. the bank's mandate is to keep inflation averaging 2 to 3 per cent over the medium term. this does not mean that it is never to exceed 3 per cent or fall below 2 per cent – it clearly has done both during the inflation targeting period. we need to be confident, however, that it will return to the 2 to 3 per cent range. viewing all of the available evidence that has accrued over the six months since we last appeared before this committee, the board came to the view that inflation was likely to exceed earlier forecasts and that corrective action was therefore needed. as you know, the cash rate was raised by 25 basis points in may and again by the same amount earlier this month. in making these decisions, the board was conscious that the global economy remains very strong, with output expanding at an above - average pace for the fourth year in a row. it also noted that global inflationary pressures have been rising. this is in part the consequence of the very accommodative monetary policies that the major countries ran over 2003 and 2004. while the english - speaking countries have generally returned interest rates to more normal levels, the continuing low level of interest rates in asia

. the second risk that i mentioned earlier was a boom and bust in asset prices. i do not think this is a serious risk at the moment, although it was not that long ago that it posed a threat. in 2003, we had both household borrowing and house prices growing at over 20 per cent, and that was on top of several earlier years of strong rises. if 2004 had produced another year of 20 per cent growth, then we would have had the makings of a serious boom and bust situation. as it was, 2004 was a very good year in this respect as borrowing slowed and house prices retreated for most of the year. growth in borrowing seems to have now settled for the time being at a rate of about 13 per cent per annum, and house prices may have risen in the december quarter of 2004. it is too early yet to know where either borrowing or house prices are headed. the third risk i mentioned was the balance of payments, where the current account deficit is estimated to be 6¾ per cent of gdp. this is not very different to the level reached on a number of occasions over the past two decades, but it is disappointing given that it has occurred against the background of a reasonably buoyant world economy and a strong rise in the terms of trade. strong domestic demand pushing up imports is part of the story, but the bigger part is the failure of the volume of exports to rise sufficiently to take advantage of the strong world demand. we have recently analysed this at some length, and presented our conclusions in our quarterly statement. i will be happy to talk about this later in more detail. but while the balance of payments result is disappointing, it is not of itself a reason for a monetary policy response. at this point, i usually look back at the forecasts i gave the committee last time to see how the outlook has changed. i also make a couple of new forecasts. on economic growth, last year was one of the few examples where the growth rate we now expect will be well below what we had forecast. in the middle of last year we were forecasting 3¾ per cent growth for the year to the december quarter 2004 ; now we think that when we receive the december quarter national accounts next month, they will show a growth rate of not much more than 2 per cent. how do we explain the difference? one explanation would emphasise that the national accounts are showing a picture of the economy which is considerably weaker than that shown by most other