Statement by the Governor, Mr Ian Macfarlane: Reduction in Interest Rates - July 1997 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 1997-07-30

Media Release
Statement by the Governor, Mr Ian Macfarlane:
Reduction in Interest Rates
30 July 1997
Following discussions with the Board, the Bank will act in the money market this
morning to reduce the cash rate by 50 basis points, to 5.0 per cent. This
change, like the four previous reductions in interest rates over the past
year, is based on the improving picture for Australia's medium-term inflation
performance, which opens up scope for faster growth in output and employment.
Recent good news on prices and wages confirms the absence of inflationary pressures
in most segments of the Australian economy. Over the year to the June quarter
the underlying rate of consumer price inflation was 1.7 per cent. Measures
of inflation at the producer level, and indications of price increases from
the range of business surveys, generally confirm this picture.
Prices of traded goods have fallen over the past year, and inflationary pressures
generated domestically have also been declining, as reflected in smaller
price increases for domestically produced goods and services of late. Recent
data on average earnings suggest that the upward pressures on wages that
were still being felt in 1996 are now subsiding. Some of the easing in prices
and wages, no doubt, reflects the lagged effect of slower growth last year,
but it is also clear that inflationary expectations in the Australian community
have taken a further step down. The Bank currently forecasts that inflation,
in underlying terms, will remain below 2 per cent into 1998.
Economic growth in 1997 has been picking up, but remains moderate. Unemployment has
been flat over the past year and utilisation of capital in goods-producing
industries is well down on peak levels. As a result, there appears to be
relatively little risk of encountering capacity constraints over the next
year or two, even if growth were stronger than expected.
Monetary policy cannot fine-tune the cycle or manufacture sustained high rates of
real growth. Given the current conjuncture, however, monetary policy should
not stand in the way of a period of stronger growth that can be accommodated
without breaching the inflation objective. Indeed, one attraction of an inflation
targeting regime is that it requires the central bank to re-assess policy
when the forecast profile of inflation is below the objective. In reaching
a decision, the Bank has also had to be mindful of the fact that earlier
interest rate reductions are still working their way through the economy.
Its judgment, however, is that the balance of risks at this time is such
as to favour this further easing of monetary policy.
The crucial test for monetary policy is to have the setting that will best contribute
to low inflation and economic growth in the long run. For many in the financial
markets, most attention seems to be devoted to picking the exact day when
a change in monetary policy will occur, something which would be made easier
if the Bank were to follow a rule such as changing monetary policy on the
day following the Board meeting. Despite its simplicity, this has never become
standard practice because of its lack of flexibility; only eight of the 22
changes made since 1990 have occurred on the day following the Board meeting.
On this occasion, the good CPI and wages data led to a presumption of a further
reduction in interest rates. As a result, the Bank decided to confer, ahead
of the routine meeting, with Board members to seek their views on the stance
and timing of policy. Today's announcement reflects that consultation. With
the Board agreed on the need for a half-point reduction in interest rates,
and with this fully factored into financial prices, there seemed to be no
point in delaying the implementation for another week.
Mr G.R. Stevens
Assistant Governor
(Economic)
(02) 9551 8800
Mr R. Battellino
Assistant Governor
(Financial Markets)
(02) 9551 8200