Statement by the Governor, Mr Ian Macfarlane: Reduction in Interest Rates - May 1997 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 1997-05-23

Media Release
Statement by the Governor, Mr Ian Macfarlane:
Reduction in Interest Rates
23 May 1997
Following consideration at the Board meeting earlier in the month, the Bank will
operate in the money market today to reduce the cash rate from 6.0 per cent
to 5.5 per cent.
Underlying inflation in Australia has been about 2 per cent over the past year, and
the Bank's assessment is that it will fall below 2 per cent in coming quarters.
In line with this fall in recorded inflation, measures of inflationary expectations
have also fallen in recent months.
Economic activity is picking up from the second half of last year. Employment growth
is still subdued, although forward-looking data suggest some firming in labour-market
conditions ahead. Overall, 1997 looks like being a year of stronger growth
than 1996. Longer-term prospects for growth are also good, and are helped
by the ongoing fiscal consolidation confirmed in the recent Budget. At the
same time, this growth does not seem likely to put upward pressure on inflation
in the next year or two.
The above considerations – namely, inflation forecast to fall below 2 per cent,
and economic activity providing scope for further expansion – amount
prima facie
case for an easing in policy. Such a judgment, however,
also depends on the longer-term outlook for inflation, and here domestic
costs, particularly wages, become a key consideration. Recently, this has
been an area of some uncertainty as the data have been difficult to interpret
and subject to revision.
The Bank's ‘on-balance’ assessment is that the current pace of growth of
labour costs, although not yet optimal for an economy with inflation as low
as ours, has shown sufficient moderation over the medium term to permit a
further easing of policy. Recent decisions by the Industrial Relations Commission,
particularly the Safety-Net Review, have helped in this respect, and removed
one factor which could have pushed up aggregate wages. Increases obtained
in enterprise bargains appear to have moderated slightly in recent quarters.
The results of the survey of average weekly earnings, particularly ordinary-time
earnings in the latest figures, seem to be consistent with the maintenance
of a satisfactory inflation performance. Allowing for the fact that public-sector
figures (and hence total figures) are almost certainly overstated by compositional
distortions, our assessment is that earnings growth is approximately 4 per
cent and steady, rather than the nearly 4½ per cent and rising that
seemed to be the case. In the private sector, earnings growth appears to
be a little below that.
Our overall assessment of wage bargaining still recognises that some settlements
remain higher than seems likely to be sustainable over the longer term. Pay
settlements of 5 per cent, except in unusual circumstances, are likely to
be too high, given our level of unemployment.
Mr G.R. Stevens
Assistant Governor
(Economic)
(02) 9551 8800
Mr R. Battellino
Assistant Governor
(Financial Markets)
(02) 9551 8200