Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - December 2001 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2001-12-05

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
5 December 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 a further
25 basis points, to 4.25 per cent.
International economic conditions remain weak, with the US and Japanese economies
in recession, growth in Europe stalled and significant contractions over
the past year in a number of Australia's east Asian trading partners. On
the basis of the most recent set of forecasts available, 2001 and 2002 together
will record the weakest growth among the major countries since the early
1980s. At the same time, however, the risk of an even larger international
contraction, which appeared to increase after the events of mid September,
has abated somewhat recently. The rapid easing of monetary policy in major
countries, and the large decline in oil prices, are both helping to set the
conditions for recovery commencing during the year ahead. In response to
these developments, financial markets around the world have recently displayed
a good deal more confidence, with share prices and interest rates rising.
Even so, the timing and speed of a recovery in international conditions are
as yet far from clear.
On the Bank's estimate, the Australian economy has grown at an annualised rate of
about 3 per cent so far in 2001. The housing expansion, together with some
recovery in non-dwelling construction, will continue to assist growth in
the short term. But the dampening impact on other parts of the economy of
global events will become increasingly clear during 2002, at a time when
the housing upswing will begin to moderate. Provided that consumer spending
and business investment hold up, the Australian economy can be expected to
continue recording better growth over the year ahead than other comparable
countries, but at a rate below its longer-run potential.
As a result, the appreciable degree of spare capacity which has built up over the
past year is likely to persist. This can be expected to impart a degree of
downward pressure on inflation, which will become more apparent as the temporary
effects of the exchange rate decline fade. Most measures of wages already
hint at a peak in the growth of labour costs, and international prices are
falling. Hence the Bank's judgement is that, despite higher prices in particular
areas such as insurance, and air travel, inflation will decline during the
second half of 2002.
The Board judged that these considerations pointed to the advisability of a further
modest easing in monetary policy, notwithstanding the fact that conditions
were already quite accommodative relative to historical experience. This
will support growth in domestic demand, at a time when international conditions
are weak, and will be consistent with achieving the inflation target over
the medium term.
Mr G.R. Stevens
Assistant Governor (Economic)
(02) 9551 8810
Dr R.W. Rankin
Head of International
(02) 9551 8410
Media Office
(02) 9551 8111