Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - August 2006 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2006-08-02

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
2 August 2006
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 6.0 per cent. The decision reflects the Board's assessment
that economic activity remains strong and that inflation pressures have increased.
Growth of the Australian economy is taking place against the background of strong
international conditions. The world economy is in its fourth successive year
of above-average growth, and official and private-sector forecasts are that
this will continue next year, despite some moderation in the United States.
The general strength of the global economy has been reflected in further
increases in commodity prices since the start of the year. These increases
have been broadly based and are adding to the growth in Australia's national
income and spending.
Despite regional differences, most indicators suggest that demand and output in Australia
have strengthened over recent months. A favourable business climate, strong
profitability and high levels of capacity usage are contributing to rapid
growth in investment spending. Even with moderate growth in household spending,
this has underpinned a solid rate of expansion in domestic demand and a pick-up
in employment over recent months.
Strong demand for finance over the past few months indicates that households and
businesses have continued to find it attractive to borrow at recently prevailing
interest rates. Compression of lending margins over recent years has contributed
to a lowering of borrowing costs relative to the cash rate. This has meant
that although the cash rate has recently been slightly above its average
for the low-inflation period since 1993, interest rates paid by borrowers
have remained below average.
The growth of demand, against the background of an economy operating with limited
spare capacity, has contributed to increased inflationary pressures this
year, and businesses report that labour market conditions are tight. Raw
materials costs have picked up as a result of broad-based increases in global
commodity prices, and there has been a more general pick-up in output prices
at all stages of production.
These pressures have also been evident in underlying consumer price inflation. In
the June quarter, underlying inflation is estimated to have picked up to
a rate of just under 3 per cent, confirming the upward drift that had started
to become apparent in the previous quarter. Although the increase in the
headline CPI was much larger, reflecting fuel price increases and a sharp
rise in the price of bananas in the wake of Cyclone Larry, the Board recognises
that it is necessary to abstract from temporary influences in forming its
policy assessments. Overall the Board's assessment, based on the gradual
increase in underlying inflation this year, and the wider background of above-average
global growth and strong domestic demand, was that underlying inflation in
the period ahead was likely to exceed previous forecasts.
Given these circumstances, the Board judged that an increase in the cash rate was
warranted in order to contain inflation in the medium term.
Dr Malcolm Edey
Assistant Governor (Economic)
Phone: +61 2 9551 8800
Mr Ric Battellino
Assistant Governor (Financial Markets)
Phone: +61 2 9551 8200
Manager, Media Office
Information Department
+61 2 9551 8111
Fax: +61 2 9221 5528