Statement by the Governor, Mr Ian Macfarlane: Reduction in Interest Rates - November 1996 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 1996-11-06

Media Release
Statement by the Governor, Mr Ian Macfarlane:
Reduction in Interest Rates
6 November 1996
The Bank will operate in the money market today to reduce the cash rate by 0.5 of
a percentage point to 6.5 per cent. This decision was taken by the Board
yesterday in view of the improvement in the outlook for inflation, which
has increased the scope for the economy to sustain a faster rate of growth.
The latest CPI shows underlying inflation has returned to the range targeted by the
Bank and endorsed by the Government. Several factors have contributed to
the easing of inflationary pressures, including a relatively firm exchange
rate and low inflation rates abroad. Slower growth of average wages in the
latest figures is, however, of most significance for the Board's view of
the inflation outlook over the next year. The economy-wide measure of ordinary-time
earnings rose by 3.5 per cent over the year to the September quarter, a pace
which, if sustained, is compatible with maintaining 2–3 per cent inflation.
The Bank's view is that monetary policy should not stand in the way of higher growth
if the economy has the capacity to achieve that growth without threatening
the low inflation objective. In current circumstances, with employment growth
moderate and with unemployment still relatively high, the scope for stronger
growth ought to be ample.
Over the past year, the Bank has, on several occasions, expressed some disquiet about
the rate of increase in wages and salaries negotiated through enterprise
agreements and with executives. This concern remains. In the private sector,
these increases are running at more than 5 per cent and, unlike price inflation
and economy-wide measures of wages, have shown no evidence of slowing. The
moderation in average wage costs was achieved only because other employees
have received relatively small rises, a situation which may not be sustainable.
There is clearly a need for some slowing in the wage increases produced by
enterprise bargains. The return of underlying inflation to around 2½
per cent – its average over the past five years – should reassure those involved
in wage and salary negotiations that the already lengthy period of low inflation
will be sustained, and provide confidence to negotiate on that basis. Failure
to do so would inevitably result in slower employment growth than would otherwise
be possible.
The easings in monetary policy announced in July and today have resulted in reductions
in short-term interest rates of 1 percentage point, and long-term yields
have fallen by 1¾ percentage points since June. If today's cut flows
through as the Bank expects, mortgage interest rates will have returned to
their low point of mid 1994, and business lending rates will be less than
a percentage point above their low point of two years ago. These favourable
financial developments should improve cash flows of both business and household
borrowers, and provide increased impetus to spending and confidence.
Dr S.A. Grenville
Assistant Governor (Economic)
(02) 9551 8800
Mr R. Battellino
Assistant Governor (Financial Markets)
(02) 9551 8200