Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - March 2001 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2001-03-07

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
7 March 2001
Following a decision taken by the Board at its meeting yesterday, the Bank will be
acting in the money market this morning to reduce the cash rate by 25 basis
points to 5.50 per cent. In deciding to make this additional move, following
the reduction of 50 basis points in February, the Board took into account
the following main considerations.
Recent data on wage costs and inflation expectations have confirmed that the outlook
for inflation is now more secure. As discussed in detail in the February
Statement on Monetary Policy, the December quarter CPI suggested an underlying
inflation rate of around 2 per cent (excluding temporary effects of the
GST and petrol prices), with the prospect that it would rise only modestly
from that level in the period ahead. Hence, the Bank assesses that the risks
of inflation exceeding the target in the foreseeable future are low.
Domestic economic data suggest that the economy weakened quite markedly towards the
end of 2000 and remained weak in the first months of 2001. One factor is
the one off transitional effect of the new tax system which brought a significant
amount of construction forward into the first half of 2000 and consequently
led to a sharp contraction in the second half of the year. But there is
also evidence of softening of employment and domestic demand more broadly.
While the transitional effects will soon fade, there is a risk that recent
weakness, coupled with lower levels of business confidence now prevailing,
could continue to dampen growth.
Prospects for the international economy have deteriorated further. In the United
States, confidence has continued to decline, and new data in Japan have
presented a distinctly weaker picture in recent months. Reflecting these
trends, official and private sector forecasters have made further downward
revisions to projected growth of the world economy in 2001. While Australian
exporters continue to benefit from a highly competitive exchange rate, these
international developments will make for a more difficult trading environment
in the coming year.
The Board believes that the Australian economy should show considerable resilience,
even if the world economy is weaker. Despite recent falls, business profitability
is still high, corporate balance sheets remain in good shape and credit
is freely available. Unlike earlier expansions, the present one has not
led to significant rises in price or wage inflation, clearly over valued
asset prices or over investment and excess capacity. In addition, the settings
of fiscal and monetary policy are both contributing to growth, and the level
of the exchange rate has made the traded sector extremely competitive.
On balance, the Board judged that a further shift in the stance of policy, towards
a setting more supportive of growth, would now be beneficial to the economy.
Mr G.R. Stevens
Assistant Governor (Economic)
(02) 9551 8800
Mr R. Battellino
Assistant Governor (Financial Markets)
(02) 9551 8200