Statement by Glenn Stevens, Governor: Monetary Policy - November 2006 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2006-11-08

Media Release
Statement by Glenn Stevens, Governor: Monetary Policy
8 November 2006
At its meeting yesterday, the Board decided to increase the cash rate by 25 basis
points, to 6.25 per cent. The decision was taken against a background of
continued expansion in the global economy and further evidence that inflationary
pressures had increased.
The world economy has grown strongly in 2006 and is generally expected to grow at
an above-average pace in 2007. Although growth in the United States has moderated
recently, strong conditions are prevailing in other parts of the world. The
global expansion has contributed to high levels of commodity prices, which
continue to add to incomes and spending in Australia.
The Board took careful note of the likely economic effects of the drought, which
will lower the supply of rural produce, reduce farm incomes and may temporarily
affect prices for some foodstuffs. At this point, these developments appear
unlikely to affect significantly the medium-term outlook for inflation.
Domestic demand has been expanding at a relatively strong pace against a background
of limited spare capacity. Labour market conditions have remained tight and
businesses are reporting high levels of capacity usage. While there have
been some tentative signs of moderation in the demand for credit recently,
the overall pace of credit growth has remained strong.
This combination of forces has contributed to an increase in inflation. In the September
quarter the underlying inflation rate was around 3 per cent, up from 2½
per cent at the end of last year, and it is likely to remain around that
rate in the near term. The headline CPI increase has been noticeably larger
than this recently, though this reflects some temporary influences which
will be reversed in the quarters ahead. Producer price indices showed further
strong increases at all stages of production in the September quarter. Aggregate
wages, though not accelerating further, have continued to grow at a faster‑than‑average
The Board judged this to be an environment in which the risks of inflation exceeding
2–3 per cent over the medium term remained significant. Monetary policy has
been responding to these risks for some time, with increases in interest
rates in May and August. Some effect of those measures is becoming evident
in demand for credit by households. Nonetheless, the Board's judgement
yesterday was that a somewhat more restrictive stance of monetary policy
was required in order to moderate inflation over time, and thereby to secure
sustainable growth.
Dr Malcolm Edey
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Mr Ric Battellino
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Manager, Media Office
Information Department