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

point and a measuring stick for monetary policy decisions, which recognises that, in the end, monetary policy is really about the value of money. we arrived at this framework after a long search – the “ search for stability ” set out in detail by ian macfarlane in his abc boyer lectures in 2006. 2 the current framework is not necessarily the end of history. but it has worked well for a period not far short of two decades now, with no obviously superior framework on offer. the first such statement was between treasurer costello and ian macfarlane in august 1996. we are now up to the fifth incarnation of this agreement. see : < http : / / www. rba. gov. au / monetary - policy / framework / stmtconduct - mp - 5 - 30092010. html >. macfarlane i ( 2006 ), the search for stability, boyer lectures 2006, abc books, sydney. bis central bankers ’ speeches sometimes people ask whether a higher target for inflation might not be better, particularly when inflation is looking like it will rise and the bank is running a setting of monetary policy designed to resist that. the answer ultimately hinges on how prepared we would be to accept the things that would go with higher inflation. higher average interest rates would be among them – there is no reason that savers, any more than wage earners, would be prepared simply to accept an erosion of their financial position. that is why countries with higher inflation generally have higher nominal interest rates. moreover, whatever structural challenges the economy faces would still have to be faced at higher inflation rates. higher inflation wouldn ’ t make those issues go away, nor make them any easier to cope with ( as we know from our own history when inflation was high and structural change still had to occur ). we would simply waste more real resources as everyone sought to protect themselves from the higher inflation. in supporting the decision process that puts this framework into practice, the bank carries out a great deal of detailed statistical work, tracking several thousand individual data series. it conducts extensive liaison with businesses and other organisations, usually speaking in detail to as many as 100 contacts each month. it produces voluminous published analysis of these data. the objective of these efforts is, at its heart, fairly simple. we are trying to form an assessment about the course of overall demand in the economy and how it is travelling in relation to the economy ’ s supply potential. that assessment in turn informs a judgement as to whether inflation pressure