Statement by Glenn Stevens, Governor: Monetary Policy - August 2008 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2008-08-05

Media Release
Statement by Glenn Stevens, Governor: Monetary Policy
5 August 2008
At its meeting today, the Board decided to leave the cash rate unchanged at 7.25 per
Inflation in Australia has been high over the past year in an environment of limited
spare capacity and earlier strong growth in demand. This was evident again
in the most recent CPI data. In these circumstances, the Board has been seeking
to restrain demand in order to reduce inflation over time.
As a result of increases in the cash rate last year and early this year, additional
rises in market interest rates and tougher credit standards, there has been
a substantial tightening in financial conditions since the middle of 2007.
Some further tightening has occurred over the past couple of months. Conditions
in international financial markets remain difficult, with heightened concerns
over credit persisting.
The evidence is that the tightening in financial conditions, in conjunction with
other factors including rising fuel costs, and lower asset values, has restrained
demand. Indicators of household spending have continued to record subdued
outcomes over recent months, and credit expansion to both households and
businesses has slowed significantly. Surveys suggest a softening in business
activity, and there have also been some early signs of an easing in labour
market conditions.
The rise in Australia's terms of trade that is currently occurring is working
in the opposite direction, adding substantially to national income and ability
to spend. At the same time, high prices of oil and a range of other commodities
have added to global inflationary risks. They are also dampening growth in
a number of countries.
Given the opposing forces at work, considerable uncertainty has surrounded the outlook
for demand and inflation. On balance, however, it is looking more likely
that demand will remain subdued, and economic growth will be fairly slow,
over the period ahead. Inflation is likely to remain relatively high in the
short term, with the CPI affected by high global oil prices. Looking further
ahead, inflation in both CPI and underlying terms is likely to decline over
time, given the outlook for demand, provided wages growth remains moderate.
The Bank's forecast remains that inflation will fall below 3 per cent
during 2010.
Weighing up the available domestic and international information, the Board judged
that the cash rate should remain unchanged this month. Nonetheless, with
demand slowing, the Board's view is that scope to move towards a less
restrictive stance of monetary policy in the period ahead is increasing.
Dr Malcolm Edey
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Dr Guy Debelle
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Manager, Media Office
Information Department