Statement by the Governor, Mr Ian Macfarlane: Reduction in Interest Rates - December 1996 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 1996-12-11

Media Release
Statement by the Governor, Mr Ian Macfarlane:
Reduction in Interest Rates
11 December 1996
Following the considerations at the Board meeting last week, the Bank will operate
in the money market today to reduce the cash rate from 6.5 per cent to 6.0
This reduction essentially reflects a further improvement in the inflationary outlook.
The Bank now expects underlying inflation to stay below 2½ per cent
for the remainder of this financial year, and our assessment is for continued
good inflation performance in 1997/98. This improvement in the inflation
outlook is influenced by the strength of the exchange rate which, despite
the volatility of last week, remains above its average of recent months.
There is also further evidence from surveys of reductions in inflationary
expectations, and the price deflators in the latest National Accounts confirm
further falls in actual inflation.
Recent figures have had little effect on our assessment of economic growth in aggregate,
although the balance is slightly altered. Confidence that investment will
be a source of strength over the next year has increased, while the outlook
for consumption is a likely more subdued. Overall, it is the Bank's assessment
that the economy has the capacity to grow a little faster without putting
pressure on inflation. Today's easing, together with the two earlier ones,
should provide an environment for stronger employment growth, subject to
appropriate wage restraint.
Monetary policy should be forward looking and, to the extent possible, act pre-emptively.
In the second half of 1994, when a rise in inflation threatened, monetary
policy was tightened three times. These tightenings helped keep the increase
in inflation to modest levels, thus allowing the economy to remain on a sustainable
growth path. Over the past six months, with a pronounced fall in inflation
in prospect, monetary policy has now been eased three times.
In responding to present circumstances, monetary policy remains focused on longer-term
factors impinging on the economy, and on the outlook for inflation. Here
the outlook for labour costs remains crucial. At present, aggregate wage
developments are consistent with inflation staying at a 2 to 3 per cent average.
Monetary policy is assuming, for the time being, that this will remain the
case. However, if wages growth were to rise appreciably, either because of
enterprise bargains or centralised decisions, there would be a severe squeeze
on business, which is still coming to grips with the competitive, low inflation
environment. Monetary policy would, in such circumstances, be set to preserve
the favourable inflation outlook.
Dr S.A. Grenville
Deputy Governor
(02) 9551 9503
Mr R. Battellino
Assistant Governor
(Financial Markets)
(02) 9551 8200