Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - September 2001 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2001-09-05

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
5 September 2001
Following a decision taken by the Board at its meeting yesterday, the Bank will be
operating in the money market this morning to reduce the cash rate by a further
25 basis points to 4.75 per cent.
International economic conditions have been weaker than expected in recent months.
The US and European economies stopped growing in the middle of the year,
while a number of economies in Asia are experiencing recession. Most observers
still expect a turn for the better in the period ahead, but the timing of
this is being pushed back. The weakness in global demand is likely to be
sufficient to impart some downward pressure on prices for internationally
traded products. Prices for a range of commodities have already weakened,
though those most important for Australia remain relatively strong.
In Australia, domestic demand has resumed its steady upward path after the temporary
decline in the second half of 2000. A recovery in dwelling investment activity
is well in train, and this should be reflected in firmer labour market conditions
in due course. Business and consumer confidence are a good deal higher than
earlier in the year, and various policy initiatives have been playing a part
in encouraging this development. The Australian economy will, nonetheless,
be affected by the recent deterioration in the international environment.
Softening in some categories of exports can already be observed.
Recent data have indicated somewhat higher inflation than appeared to be the case
late last year. The Bank's assessment, as spelled out in the recent
Statement on Monetary Policy
, is that this principally reflects
the stepped up pass through of the lower exchange rate. It is likely that
this process will continue for a while, but in the slightly longer term inflation
is likely to decline again, given that wages growth remains well contained
and the economy still has a degree of spare capacity. Developments abroad
increase the likelihood of lower inflation over time.
These considerations suggest that, in line with the medium-term inflation targeting
approach, some easing of monetary policy is called for. In reaching its decision,
the Board carefully weighed one other factor, namely the rapid pace of borrowing
by households and the associated pressure on house prices. A further reduction
in interest rates runs some risk, at the margin, of unnecessarily boosting
this trend in the short term. But this risk has to be set against those which
would come over the medium term from not responding to the likely effects
of the continuing weakness abroad. On balance, the Board's judgement is that
prospects for maintaining the economy's good medium-term performance will
be improved by today's action.
Mr G.R. Stevens
Assistant Governor (Economic)
(02) 9551 8800
Mr R. Battellino
Assistant Governor (Financial Markets)
(02) 9551 8200