in the economy is likely to increase, decrease or stay about the same, and how the likely outcomes compare with the announced objective. that judgement then informs a decision as to whether monetary policy needs to restrain demand, to support it or to be “ neutral ”. of course other factors that affect prices – like exchange rate changes, changes in the price of oil, and so on – have to be taken into account as well. note that the economy ’ s supply potential is a key element in the above framework. this is not a directly observable thing : there is no time series labelled “ potential supply ”. assumptions have to be made about the availability of productive factors – labour and capital – and about the productivity with which these factors can be used. this is why the current productivity discussion is so important. incidentally, the desire for more productivity is not a call for working harder. australians already work pretty long hours by international standards. productivity per hour, which is what counts, is not improved by adding more hours, but by finding ways of making the hours that are already being contributed more effective. the board ’ s decision each month, and the reasoning behind it, are communicated to the public. these statements are among the most closely scrutinised documents in the country. i am often awed by the layers of hidden meaning that people are able to detect in them. but the main purpose of these statements, and of all the other communication we do, is simply to try to make the bank ’ s assessment of the outlook and its actions as understandable as possible to the many people who need to make long - term decisions, including households and businesses. of course, events and new information often change the outlook, as we have seen recently. recent developments how has the board evaluated recent developments within the above framework? 3 throughout the past year or so, the forecasts that the bank ’ s staff have provided to the board have suggested that underlying inflation would probably stop falling and then gradually rise through the three - year forecast period. the backdrop to this view was that the rise in the the deputy governor recently gave a very good account of this in more detail than i can attempt here today. see : < http : / / www. rba. gov. au / speeches / 2011 / sp - dg - 230811. html >. bis central bankers ’ speeches terms of trade was expansionary for incomes and investment, which would likely see demand growth remain pretty strong even as

heightened competition between firms seeking to attract and retain the right workers. for the workforce, this is a good prospect in that they might expect to enjoy somewhat stronger growth in real wages than otherwise. firms would also face greater incentives to economise on labour through labour - saving capital investment, which will raise perworker productivity. in time, we may also see a reversal of the tendency towards early retirement that we have seen over the past 20 years or so. my guess would be that the value of older, experienced employees with a lot of accumulated human capital is likely to be re - appraised by employers, so from the demand side there might be a desire to retain these employees in a world where younger workers are relatively less abundant. and on the supply side, the intersection of longer life expectancy and modest returns on assets may prompt some re - evaluation of retirement ages on the part of older workers. no doubt government policies could influence these choices too. depending on how all that plays out, a further implication is that we might find at some point that the gdp growth rate of 4 per cent or more, which has been quite sustainable for a number of years as we have gradually wound in the spare capacity in the economy, has to give way to something a bit lower. there are two obvious reasons for this which stem from the discussion above. first, the scope to harness existing under - utilised labour is finite and would be mostly used up in the scenario in question. second, the growth rate of the total labour force will be lower than in the past due to demographic factors. in other words, the economy's growth rate would have to slow to its medium - term potential rate, which is a bit lower than the actual growth we have experienced in recent years, and that potential growth rate itself is coming down a little - all assuming nothing else changes. under such circumstances, one of the things we will presumably see is continued, or even heightened, discussion of the forces which affect the economy's medium - term potential growth rate apart from the growth in factors of production ( i. e. labour and capital of various kinds ). there's only one : productivity performance. here australia's recent record has been good. in international studies, the australian economy stands out as having had a remarkable pick - up in productivity growth during the 1990s. among the reasons behind this performance, and probably the most important one, is the widespread liberalisation and opening up of the economy to competitive