Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - May 2006 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2006-05-03

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
3 May 2006
Following a decision taken by the Board at its meeting yesterday, the Bank will be
operating in the money market this morning to increase the cash rate by 25 basis
points, to 5.75 per cent.
International developments are continuing to provide stimulus to growth in Australia.
The world economy is growing at an above-average pace for the fourth successive
year and, significantly, forecasts have recently been revised upwards. Commodity
prices have been increasing strongly for some time, and they have risen further
in the year to date. This suggests a strengthening in the outlook for Australia's
export earnings, with consequent expansionary effects on incomes and spending.
In Australia, domestic spending has been growing at a solid pace recently and prevailing
conditions suggest that this is likely to continue. High profitability and
rising share prices are indicative of a favourable business environment in
which investment growth is likely to remain strong. There are also signs
that the dampening effects of household balance-sheet adjustment on consumer
spending are starting to wane.
Recent trends in credit growth indicate that households and businesses have continued
to find it attractive to borrow at prevailing interest rates. After touching
a low point in the September quarter, the growth of household credit has
picked up over the two most recent quarters. Business credit growth has continued
to trend upwards. A factor that is likely to have contributed to the overall
strength of credit growth has been the continuing compression of lending
margins by financial intermediaries over recent years, reflecting competition
among lenders. As a consequence, although the cash rate has been close to
its historical average, interest rates paid by borrowers have remained below
These domestic and international trends have added to inflationary pressures in an
economy that has been operating for some time with rather limited spare capacity
and low unemployment. Wages growth, though not accelerating further recently,
is higher than it was a year ago, and businesses are continuing to report
that suitable labour is scarce. Raw materials costs continued to increase
strongly in the March quarter, reflecting the general strength in global
commodity prices. Consumer price inflation has picked up to around 3 per cent
in recent quarters. While this partly reflected rising fuel costs, underlying
consumer price inflation also increased in the March quarter, to around 2¾ per cent,
a rate it had not been expected to reach until the second half of the year.
Taking all of these developments into account, the Board judged at its May meeting
that inflationary risks had increased sufficiently to warrant an increase
in the cash rate.
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Mr R Battellino
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Manager, Media Office
Information Department
+61 2 9551 8111
Fax: +61 2 9221 5528