Statement by Glenn Stevens, Governor: Monetary Policy Decision - May 2012 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2012-05-01

Media Release
Statement by Glenn Stevens, Governor:
Monetary Policy Decision
1 May 2012
At its meeting today, the Board decided to lower the cash rate by 50 basis points
to 3.75 per cent, effective 2 May 2012. This decision
is based on information received over the past few months that suggests that
economic conditions have been somewhat weaker than expected, while inflation
has moderated.
Growth in the world economy slowed in the second half of 2011, and is likely to continue
at a below-trend pace this year. A deep downturn is not occurring at this
stage, however, and in fact some forecasters have recently revised upwards
their global growth outlook. Growth in China has moderated, as was intended,
and is likely to remain at a more measured and sustainable pace in the future.
Conditions in other parts of Asia softened in 2011, partly due to natural
disasters, but have recently shown some tentative signs of improving. Among
the major countries, conditions in Europe remain very difficult, while the
United States continues to grow at a moderate pace. Commodity prices have
been little changed, at levels below recent peaks but which are nonetheless
still quite high. Australia's terms of trade similarly peaked about six
months ago, though they too remain high.
Financial market sentiment has generally improved this year, and capital markets
are supplying funding to corporations and well-rated banks. At the margin,
wholesale funding costs have declined over recent months, though they remain
higher, relative to benchmark rates, than in mid 2011. Market sentiment remains
skittish, however, and the tasks of putting European banks and sovereigns
onto a sound footing for the longer term, and of improving Europe's growth
prospects, remain large. Hence Europe will remain a potential source of adverse
shocks for some time yet.
In Australia, output growth was somewhat below trend over the past year, notwithstanding
that growth in domestic demand ran at its fastest pace for four years. Output
growth was affected in part by temporary factors, but also by the persistently
high exchange rate. Considerable structural change is also occurring in the
economy. Labour market conditions softened during 2011, though the rate of
unemployment has so far remained little changed at a low level.
Recent data for inflation show that after a pick up in the first half of last year,
underlying inflation has declined again, and was a little over 2 per cent
over the latest four quarters. CPI inflation has also declined, from about
3½ per cent to a little over 1½ per cent at the latest
reading, as the weather-driven rises in food prices in the first half of
last year have, as expected, now been fully reversed. Over the coming one
to two years, and abstracting from the effects of the carbon price, inflation
will probably be lower than earlier expected, but still in the 2–3
per cent range.
As a result of changes to monetary policy late last year, interest rates for borrowers
have been close to their medium-term averages over recent months, albeit
tending to increase a little as lenders passed on the higher costs of funding
their books. Credit growth remains modest overall. Housing prices have shown
some signs of stabilising recently, after having declined for most of 2011,
but generally the housing market remains subdued. The exchange rate remains
high even though the terms of trade have declined somewhat.
Since it last changed the cash rate in December, the Board has maintained the view
that the setting of policy was appropriate for the time being, but that the
inflation outlook would provide scope for easier monetary policy, if needed,
to support demand. The accretion of evidence over recent months suggests
that it is now appropriate for a further step in that direction.
In considering the appropriate size of adjustment to the cash rate at today's
meeting, the Board judged it desirable that financial conditions now be easier
than those which had prevailed in December. A reduction of 50 basis points
in the cash rate was, in this instance, therefore judged to be necessary
in order to deliver the appropriate level of borrowing rates.
Dr Christopher Kent
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Dr Guy Debelle
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Media Office
Information Department