Continued weakness in nominal GDP growth in Australia implies that the neutral policy interest rate continues to fall. However, evidence of rising asset prices particularly in the housing markets of Sydney and Melbourne makes the setting of interest rates increasingly complex. From the point of view of short term macroeconomic factors, low interest rates in Australia could be justified, however, the distortion this is causing in asset markets is worsening. This highlights the difficult tradeoff between short term growth and medium term vulnerability. My judgement is that the damage caused by a painful adjustment in the housing market and the high levels of leverage by households in an environment of a downward adjustment in trend economic growth is a dangerous mix that loose monetary policy and even more financial leverage cannot solve. Add to this situation, the move to normalize interest rates in the US and there are many bad scenarios for Australia that are plausible. I recommend leaving interest rates unchanged (indeed I would not have lowered them to the current level). Monetary policy should be focused on medium term stability especially if it has little prospect of solving the problems that cause weak short term demand. There is strong evidence that a point have been reached where monetary policy cannot offset the core problems caused by uncertainty about economic and political prospects in the Australian economy. The lack of substantial policy assistance from fiscal rebalancing or substantive economic reform generally, is increasingly backing the Reserve Bank into a corner. It appears that many politicians do not appreciate the risks that now face the Australian economy. No wonder investment is weak and uncertainty is damaging economic prospects in Australia. It may be that the optimistic projections in the recent federal budget turn out to be correct, however, the vulnerabilities within the Australian economy are growing and lower interest rates without any other policy response makes this situation worse.