community can eventually feel the effects. so it matters a lot. one of the things the rba seeks to do is to provide balanced analysis about the economy and the financial system and where the risks lie. we hope that this helps people make informed decisions about their finances. we also have a public education program that is aligned with the school curriculum. as part of this, we are devoting significant resources to helping support the teaching of economics and finance in our schools. people can also visit the reserve bank ’ s museum, where they can learn about australia ’ s banknotes and economics more generally. the bank has also been a partner in the recent upgrading of australia ’ s payment system, which is allowing you to make more timely payments. for many australians, their biggest single financial decision is whether or not to borrow to buy a home. it is an important decision, one that can have a major bearing on your finances for years to come. i am not allowed to give financial advice, but i would like to make four brief points that we should all keep in mind. the first is that interest rates go up and down. it is nearly eight years since the previous increase in interest rates by the rba. this means that many borrowers have never experienced a rise in official interest rates. they have mostly 1 / 2 bis central bankers'speeches experienced lower rates. at some point this will change. over recent times the australian economy has been improving. this is good news. if we continue on this current improving track, as we expect we will, it is likely that the next move in official interest rates will be up, not down. this will not be welcomed by some, but it would be a sign that things are returning to normal. my advice here is to make sure your finances can withstand a lift in interest rates. the second point is that housing prices don ’ t always go up ; like interest rates, they go up and down. we are seeing an example of this in sydney and melbourne at the moment. and most of our cities have seen falls in housing prices at some point over the past decade. while i would expect housing prices to trend higher over time as our incomes increase, there is no guarantee that your home will be worth more tomorrow than it is today. so plan accordingly. the third point is closely related. make sure you build adequate financial buffers into your plans. things don ’ t always turn out as we expect. so for most of us, having a buffer

of maximum “ go ”, and heavy braking. this is a reading of the framework we do not share. there is a range of settings of the instrument between “ maximum go ” and “ heavy braking ”. most of the time we would expect interest rates to be in that range. let us look at two possible situations where monetary policy should be changed : • the first is when inflation is above the target. in this situation, the inflation targeting framework would say to raise interest rates to a setting which would bring inflation back to the target. but once the higher rates had done their job, they should be gradually reduced to more normal levels. this is what happened in 1996. we did not wait until our forecast had inflation falling below 2 % before we started to ease. • the second is when inflation is below the target. in this case, the framework would call for a setting of interest rates which would, over time, allow inflation to go back up to the target. once it is clear that such a setting had done its job, the framework calls for it to be replaced by one more likely to keep inflation at the target. the framework does not envisage the policy setting being maintained until something goes wrong. now some may object that all this smacks of fine tuning. i agree that we should not delude ourselves that the economy can be precisely controlled so that inflation stays within or close to the band, even when there are no external shocks. the point remains, however, that even if the process is not precise, the instrument does not remain at its most extreme setting once that is no longer needed. as the outlook changes, and as the balance of risks shifts, it is appropriate also for the policy instrument to shift. 3. what about the gst? some people have not been convinced by the arguments i have used above. some still cannot understand why you would tighten unless the economy was overheating, and assume that there must be a hidden agenda. others are keen to play the old game of trying to find a political dimension to monetary policy. this has led some people to say that the real reason is our fear of the inflationary effects of the gst, but that we are too diplomatic to say so. i am sorry to disappoint the proponents of this view, but that is not the case. • if the gst was the reason for tightening monetary policy, why have the fed, the bank of england and the ecb tightened monetary policy?