Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - November 2003 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2003-11-05

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
5 November 2003
Following a decision taken by the Board at its meeting yesterday, the Bank will be
operating in the money market this morning to increase the cash rate by 25
basis points, to 5.0 per cent.
For an extended period, the setting of monetary policy in Australia has been mildly
expansionary. This stance was, in the Board's judgment, the best response
to a weak world economy, very low global interest rates, downside risks to
growth at home, and contained inflation. However, the need for such a stance
of policy has now passed. This assessment is based on several considerations:
Conditions in the international economy are clearly improving. The US economy is
strengthening and growth in Japan is higher than expected. Most of east
Asia is experiencing improved conditions and China continues to grow rapidly.
Financial market pricing embodies more optimism about growth, and economic
forecasts are being revised upwards. The appreciation of the Australian
dollar must be seen against that backdrop.
The Australian economy, having slowed under the weight of reduced exports and drought,
is now picking up. Strong domestic demand appears to be the main factor
so far, with both consumption and business investment growing strongly.
Business surveys indicate unexpected strength in the non-farm economy in
recent months, and the labour market is firming. The farm sector, as a result
of improved rainfall, will experience better conditions over the next year.
Hence growth is likely to be above trend through the coming year, and spare
capacity in the economy will tend to decline. The housing market continues
to be buoyant. The effect of the rise in house prices over recent years
is likely to be expansionary for the economy in the period ahead, as higher
wealth is accessed to support household spending.
In the short term, these developments are unlikely to make for significant problems
on CPI inflation. Indeed, it will most likely decline for a time, as the
effects of the appreciation of the exchange rate show up in retail prices.
Over a longer horizon, inflation is currently expected to be consistent
with the target, but the risks to that forecast are beginning to tilt upwards.
The prevailing stance of policy has been expansionary, as is clear not only from
the current low level of nominal and real interest rates, but also from
the behaviour of borrowers. Credit outstanding is rising at around 14 per
cent per year, and at over 20 per cent to households. That is a much faster
rate of growth than can be expected to be consistent with economic stability
over the longer run. Short periods of rapid credit growth have not typically
been a major concern for monetary policy, but this growth has been sustained
for some time and at present shows no sign of abating.
Given the above, the Board's view is that it is no longer prudent to continue with
such an expansionary policy stance. The strength of demand for credit increases
the danger associated with delaying a tightening of policy that is called
for on general macroeconomic grounds.
Mr R. Battellino
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Manager, Media Office
Information Department