Statement by the Governor, Mr Ian Macfarlane: Monetary Policy - May 2000 | Media Releases | RBA
Central bank: rba | Type: statement | Date: 2000-05-03

Media Release
Statement by the Governor, Mr Ian Macfarlane: Monetary Policy
3 May 2000
Following a decision made by the Board at its meeting yesterday, the Bank will be
raising the cash rate target by 25 basis points, to 6 per cent, effective
immediately.
At its meeting, the Board again considered the range of domestic and international
factors relevant to monetary policy. Domestically:
While some indicators of domestic demand suggest that growth rates have moderated
from the very high rates in the second half of 1999, the Australian economy
is benefiting from stronger exports and rising terms of trade.
On the latest available data, the demand for credit, if anything, has strengthened
so far in 2000. Credit growth over the year to March of 11–12 per
cent, and over 16 per cent for households, remains above that which can
be sustained in the long run. Gains in household wealth have been large,
related mainly to the strong rise in dwelling prices. Readily-available,
low-cost credit accommodated this increase.
Inflation in Australia as measured by the CPI has continued to increase. It rose
towards the top of the target zone in March and is likely to remain there
in the short term. The rise in petrol prices has played an important role.
Recent trends in the US dollar price of oil suggest that this may now have
run its course, with a small decline in petrol prices possible in the next
quarter or two, depending on the course of the exchange rate. But a range
of underlying measures of inflation, which are not distorted by energy prices
and which give a better indication of the trend in consumer prices, show
a gradual, but clear, pick-up. These are now about 2¼ per cent, compared
with a low of around 1½ per cent late in 1998. Expectations of inflation
have also increased. Together with a gradual tightening in the labour market
as indicated by survey data, this suggests that some pick-up in wage pressures
could easily occur over the coming year or two.
On the international front:
Global economic conditions are now much stronger than a year ago, and forecasts for
global growth have been further upgraded in recent months. Share market
developments to date have not caused any significant revision to the economic
Inflation and wage costs have picked up in the United States, and in some other countries
there has been some rise in underlying inflation.
World interest rates have continued to increase. The Board noted that most developed
countries had now raised interest rates by between 100 and 150 basis points
over recent months. While the bulk of this rise reflected a return to more
normal levels of interest rates after the unusually low levels of 1998,
for some countries exchange rate weakness was also adding to upward pressure
on inflation and interest rates.
The exchange rate of the Australian dollar had fallen further.
In the light of these developments, the Board assessed that the earlier increases
in Australian interest rates were appropriate, and that the inflationary
risks looking forward warranted a further small increase. In particular,
the potential for a weak exchange rate to adversely affect domestic inflation
had increased over the past month.
To this extent, as was the case at the time of its decision to raise interest rates
in April, the Board was concerned about the increased risks to inflation
from international factors. This does not represent any change in the policy
framework the Bank has been following for some years now, but a change in
the environment in which policy operates. The Board recognised that there
is, of course, no certain or mechanical relationship between interest rates
and the exchange rate, but it assessed that instability will be reduced by
the pursuit of policies which engender confidence among domestic and foreign
investors that Australia will remain a low inflation country. Such an outcome
is essential to ensuring the longevity of the current expansion.
Mr G.R. Stevens
Assistant Governor (Economic)
(02) 9551 8800
Mr R. Battellino
Assistant Governor (Financial Markets)
(02) 9551 8200