Statement by Glenn Stevens, Governor: Monetary Policy - October 2009 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2009-10-06

Media Release
Statement by Glenn Stevens, Governor: Monetary Policy
6 October 2009
At its meeting today, the Board decided to raise the cash rate by 25 basis points
to 3.25 per cent, effective 7 October 2009.
The global economy is resuming growth. With economic policy settings likely to remain
expansionary for some time, the recovery will likely continue during 2010
and forecasts are being revised higher. The expansion is generally expected
to be modest in the major countries, due to the continuing legacy of the
financial crisis. Prospects for Australia's Asian trading partners
appear to be noticeably better. Growth in China has been very strong, which
is having a significant impact on other economies in the region and on commodity
markets. For Australia's trading partner group, growth in 2010 is likely
to be close to trend.
Sentiment in global financial markets has continued to improve. Nonetheless, the
state of balance sheets in some major countries remains a potential constraint
on their expansion.
Economic conditions in Australia have been stronger than expected and measures of
confidence have recovered.  Some spending has probably been brought
forward by the various policy initiatives. As those effects diminish, these
areas of demand may soften somewhat. Some types of capital spending are likely
to be held back for a while by financing constraints, but it now appears
that private investment will not be as weak as earlier expected. Medium-term
prospects for investment appear, moreover, to be strengthening. Higher dwelling
activity and public infrastructure spending is also starting to provide more
support to spending. Overall, growth through 2010 looks likely to be close
Unemployment has not risen as far as had been expected. The weaker demand for labour
over the past year or so nonetheless has seen a moderation in labour costs.
Helped by this and the earlier fall in energy and commodity prices, inflation
has been declining, though measures of underlying inflation remained higher
than the target on the latest reading. Underlying inflation should continue
to moderate in the near term, but now will probably not fall as far as earlier
Housing credit growth has been solid and dwelling prices have risen appreciably over
the past six months. Business borrowing has been declining, as companies
have sought to reduce leverage in an environment of tighter lending standards.
But large firms have had good access to equity capital and access to debt
markets appears to be improving, helped by the better-than-expected economic
conditions and increased willingness on the part of investors to accept risk.
Share markets have recovered significant ground.
Interest rates facing prospective borrowers on fixed-rate loans have already risen
to some extent, as markets have anticipated a higher level of the cash rate.
For many business borrowers, increases in risk margins will still be occurring
for some time yet. In addition, the exchange rate has appreciated considerably
over the past year, which will dampen pressure on prices and constrain growth
in the tradeables sector. These factors have been carefully considered by
the Board.
In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level,
in expectation of very weak economic conditions and a recognition that considerable
downside risks existed. That basis for such a low interest rate setting has
now passed, however. With growth likely to be close to trend over the year
ahead, inflation close to target and the risk of serious economic contraction
in Australia now having passed, the Board's view is that it is now
prudent to begin gradually lessening the stimulus provided by monetary policy.
This will work to increase the sustainability of growth in economic activity
and keep inflation consistent with the target over the years ahead.
Dr Philip Lowe
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Dr Guy Debelle
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
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