Statement by Glenn Stevens, Governor: Monetary Policy - October 2008 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2008-10-07

Media Release
Statement by Glenn Stevens, Governor: Monetary Policy
7 October 2008
At its meeting today, the Board decided to lower the cash rate by 100 basis points
to 6.0 per cent, effective 8 October 2008.
Conditions in international financial markets took a significant turn for the worse
in September. Large-scale financial failures in several major countries were
accompanied by serious dislocation in interbank markets and heightened instability
in other markets, including sharp falls in share prices. Official actions
in a number of countries have been aimed at restoring stability, by adding
to short-term liquidity and laying a foundation for longer-term recovery
in the health of balance sheets. Nonetheless, financing is likely to be difficult
around the world for some time ahead. This is also affecting Australia, albeit
by less than in many other countries, given the relative strength of the
local banking system.
Economic activity in the major countries is also weakening, and evidence is accumulating
of a significant moderation in growth in Australia's trading partners
in Asia. The expansionary effects of the recent surge in Australia's
terms of trade are still coming through, but some decline in the terms of
trade now looks likely over the coming year, with many commodity prices having
declined from their peaks. This, combined with the likelihood of below-trend
growth in the global economy, suggests that global inflation will moderate
Thus far, the overall path of economic activity in Australia appears to have been
close to what the Board had expected, with the needed moderation in demand
occurring. The next CPI is likely to show an increase of around 5 per
cent over the four quarters to September, but the Bank remains of the view
that inflation will start to decline in 2009.
The recent deterioration in prospects for global growth, together with much more
difficult market conditions even for creditworthy borrowers, now present
the risk that demand and output could be significantly weaker than earlier
expected. Should that occur, inflation would most likely fall faster than
earlier forecast.
Given that background, the Board judged that a material change to the balance of
risks surrounding the outlook had occurred, requiring a significantly less
restrictive stance of monetary policy. The Board also took careful note of
movements in funding costs in wholesale markets. Having weighed these considerations,
the Board decided that, on this occasion, an unusually large movement in
the cash rate was appropriate in order to bring about a significant reduction
in costs to borrowers. The Board does not, however, regard that movement
as establishing a pattern for future decisions.
The Board will continue to assess prospects for demand and inflation over the period
ahead, and set monetary policy as needed to bring inflation back to the 2–3 per
cent target over time.
Dr Malcolm Edey
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Dr Guy Debelle
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Manager, Media Office
Information Department