Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - March 2005 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2005-03-02

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
2 March 2005
Following a decision taken by the Board at its meeting yesterday, the Bank will be
operating in the money market this morning to increase the cash rate by 25
basis points, to 5.5 per cent.
For some time the Bank has been signalling that the cash rate would probably need
to be moved higher during the current expansion. The decision to do so in
March took into account the following main considerations:
The Australian economy is now in the fourteenth year of an expansion which has made
substantial inroads into the economy's surplus productive capacity. Over
recent months, it has become increasingly clear that remaining spare capacity
in the labour and goods markets is becoming rather limited.
This is now starting to result in stronger inflationary pressures. Price increases
at the producer level picked up appreciably at all stages of production
during the second half of 2004. Consumer price inflation, although currently
consistent with the target, was higher than had been expected, and is forecast
to increase to around 3 per cent by the end of next year. Continued pressure
on raw materials prices, constraints on capacity and reports of higher employment
costs – notwithstanding the steadiness to date of aggregate wage measures
– constitute a risk that this forecast will prove to be too low.
Although Australia's GDP slowed during 2004, this does not appear to have reflected
any deficiency in domestic or global demand. Domestic spending has been
growing strongly for some time and the global economy last year grew at
its fastest pace in more than a decade.
Conditions prevailing in Australia and abroad are likely to continue to encourage
spending growth in the period ahead. The world economy is growing at a faster-than-average
pace and world commodity prices are rising. In Australia, there are high
levels of confidence in both the business and household sectors, credit
growth is providing ample support for spending, employment is growing strongly
and national income and spending will continue to be boosted this year by
the rising terms of trade.
In these circumstances, the Board judged that an increase in the cash rate was warranted
in order to reduce the risk of an unacceptable rise in inflation in the medium
Dr M.L. Edey
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Mr R. Battellino
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Manager, Media Office
Information Department
+61 2 9551 8111
Fax: +61 2 9221 5528