Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - May 2002 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2002-05-08

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
8 May 2002
Following a decision taken by the Board at its meeting yesterday, the Bank will be
acting in the money market this morning to increase the cash rate by 25 basis
points, to 4.50 per cent.
In recent months the economic climate has changed markedly, with firmer prospects
now evident both in Australia and abroad. In the United States, the downturn
that commenced early last year has proven to be milder, and of shorter duration,
than had appeared likely a few months ago, and the US economy recorded strong
growth in the March quarter. While more recent indicators suggest that the
pace of growth in the United States will ease for a time, the recovery to
date has clearly exceeded earlier expectations. There has also been an upturn
among Australia's main trading partners in the east Asian region (with the
important exception of Japan) and more tentative signs of recovery in Europe.
Overall, although 2001 was a very weak year for the major economies, earlier
fears of a more severe and protracted downturn have not been realised, and
the outlook now is much more positive than was the case late last year.
The Australian economy at present is outperforming other advanced economies by a
wide margin, recording growth of more than 4 per cent during 2001, a time
when aggregate growth in the major economies was close to zero. Growth has
continued and confidence strengthened in 2002 to date, and the economy appears
well placed to continue its strong performance in the period ahead. Businesses
are expanding their investment plans, and household spending has continued
to grow strongly, supported by an upturn in employment and by rising wealth
associated with increases in house prices. The strong rises in house prices
seen over recent years have also been associated with a rapid expansion in
household debt, a process that carries longer-term risks if households become
seriously over-extended.
Australia's inflation rate, at 2.9 per cent, remains close to the top of the target
range. Inflation seems to be flattening out, following a period in which
it had been on a rising trend owing in part to the substantial depreciation
of the Australian dollar over the 1997–2000 period. There are signs
that these exchange-rate effects are beginning to fade, and hence the prospects
are for a moderate decline in inflation in the next few quarters. Over a
longer horizon, however, it is likely that inflationary pressures will continue,
as surplus capacity in the economy is gradually used up. This is a contrast
to what was expected when the Bank reduced interest rates last year.
In reviewing all these factors the Board's assessment was that the outlook no longer
warranted a level of cash rates at the bottom of the range of recent experience.
To persist with a strongly expansionary policy setting would risk amplifying
inflation pressures and, over time, could fuel other imbalances such as the
current overheating in the housing market, potentially jeopardising the economy's
continued expansion. The Board judged that an increase in the cash rate would
reduce these risks and, therefore, enhance the prospects for sustained growth
consistent with the inflation target.
Dr M.L. Edey
Assistant Governor (Economic)
(02) 9551 8810
Mr R. Battellino
Assistant Governor (Financial Markets)
(02) 9551 8210
Manager, Media Office
(02) 9551 8111