have seen price falls. developments in the sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds. i note that, on the regulatory front, apra has announced its supervisory approach to managing the potential risks posed by the rise in lending to investors in housing. this involves more intense scrutiny of investor loan portfolios growing at over 10 per cent per bis central bankers ’ speeches year, with the possibility, ultimately, of additional capital being required if apra deems it necessary. apra has also reiterated its expectations for other elements of lending standards such as interest rate buffers and floors. and asic has begun a review of interest - only lending in the context of consumer protection legislation. the bank welcomes these steps and will keep working with other regulators in these areas. the board is also very conscious of the possibility that monetary policy ’ s power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past. a decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy. today, such a channel may be less effective. nonetheless we do not think that monetary policy has reached the point where it has no ability at all to give additional support to demand. our judgement is that it still has some ability to assist the transition the economy is making, and we regarded it as appropriate to provide that support. the forecasts published last week in the statement on monetary policy assume a lower path for interest rates and a lower exchange rate than both earlier forecasts and the ones the board responded to at the february meeting. these are assumptions rather than forecasts or commitments to a course of action. it is worth noting that, despite concerns at various times about whether the exchange rate would adjust appropriately to our changing circumstances, it has been doing so over the period since we last met with the committee. against the us dollar it has fallen by around 17 per cent since our last hearing. the us dollar itself has been rising against all currencies, of course, so much of this movement is an american story rather than an australian one. against a basket of relevant currencies the australian dollar has fallen by less, but the decline is still about 11 per cent since august. further adjustment is probably going to

a return to the boom. many people say that we need more “ confidence ” in the economy among both households and businesses. we do, but it has to be the right sort of confidence. the kind of confidence based on nothing more than expectations of ever - increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. unfortunately, we have been rather too prone to that misplaced optimism on occasion. you don ’ t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. it would surely be a false basis for confidence. the intended effect of recent policy actions is certainly not to pump up speculative demand for assets. 6 as it happens, our judgement is that the risk of re - igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months. hence, i do not think we should set monetary policy to foster a renewed gearing up by households. we can help, at the margin, the process of borrowers getting their balance sheets into better shape. to the extent that softer demand conditions have resulted from as in 2009, the challenge is “ how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices ”. see stevens, g, “ challenges for economic policy ”, address to the anika foundation luncheon, sydney, 28 july 2009. bis central bankers ’ speeches households or some businesses restraining spending in an effort to get debt down, and this leads to lower inflation, our inflation targeting framework tells us to ease monetary policy. that is what we have been doing. the reduction in interest rates over the past eight months or so – 125 basis points on the cash rate and something less than that, but still quite a significant fall, in the structure of intermediaries ’ lending rates – will speed up, at the margin, the process of deleveraging for those who need or want to undertake it. in saying that, of course, we cannot neglect the interests of those who live off the return from their savings and who rightly expect us to preserve the real value of those savings. popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population – just over one - third – who