Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - December 1998 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 1998-12-02

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
2 December 1998
Following a decision by the Board at yesterday's meeting, the Bank will be acting
in the money market this morning to reduce the cash rate by 25 basis points
to 4.75 per cent.
In evaluating the stance of monetary policy, the Board recognised that the degree
of steadiness shown so far had served the economy well, but that accumulating
evidence was now pointing towards the advisability of a small reduction in
interest rates.
The past year has seen an unusual degree of turmoil in international financial markets,
but the underlying trend in the international economy has been towards lower
growth, lower inflation and lower world interest rates. Bond yields have
fallen in line with the lower inflationary expectations, while at the short
end, rates have fallen as a result of the easing of monetary policy in a
number of countries. There now seems to be widespread agreement that 1999
will see a significant slowdown in world growth. While recent indicators
do not suggest any worsening in the outlook, it still seems reasonable to
base decisions on the assumption that global growth will be slower and global
inflation low.
In the medium term, Australian monetary policy aims to achieve an average inflation
rate of somewhere between 2 and 3 per cent. Inflation has recently been running
below 2 per cent, but our forecasts point to some further pick-up, as measured
by the CPI on a four-quarter-ended basis, as a result of the decline in the
exchange rate over the past 18 months. It seems unlikely at this stage, however,
that inflation will rise above 3 per cent and the near-term peak could be
well short of that, although any forecast of inflation is only as good as
its underlying assumption about the exchange rate. Medium-term inflation
outcomes appear likely to be consistent with the target.
To date, domestic economic activity has continued to expand at a solid pace, in part
reflecting the supportive stance of monetary policy: interest rates faced
by borrowers are near thirty-year lows. In fact, the bulk of recent economic
indicators suggest that growth at present may be exceeding earlier forecasts,
and business confidence has tended to improve over recent months. However,
with a significant decline in world growth predicted by most forecasters,
it is still likely that growth in Australia will slow, at least temporarily,
during 1999. This is likely to be accompanied by an increase in the current
account deficit.
It is unrealistic to expect that monetary policy can fine tune either growth or inflation
outcomes over the next year. Some decline in growth is unavoidable, given
the international circumstances. The continuing good inflation performance,
however, and the economy's capacity to grow without generating additional
inflationary pressure, mean that it is appropriate to offer some additional
support to growth through the adoption of a more accommodative monetary policy
Mr G.R. Stevens
Assistant Governor (Economic)
(02) 9551 8800
Mr R. Battellino
Assistant Governor (Financial Markets)
(02) 9551 8200