glenn stevens : recent economic and financial developments in australia opening statement by mr glenn stevens, governor of the reserve bank of australia, to the house of representatives standing committee on economics, melbourne, 8 september 2008. * * * mr chairman, thank you for the opportunity to meet again with the house economics committee. it might be helpful for our discussion if i begin by reviewing how things stood at the time of our last meeting, and what has changed in the interim. when the committee met in april, monetary policy had been tightened in response to very strong growth in demand and a significant pick - up in inflation during 2007. the cash rate had been lifted by 100 basis points and financial intermediaries were facing additional increases in the cost of their funds, which they passed on to borrowers. this amounted to a significant tightening in financial conditions. that was necessary under the circumstances : if inflation was to decline over time to be consistent with the 2 - 3 per cent medium - term target, a precondition was to contain demand, which had run too far ahead relative to productive capacity. the fact that inflation picked up noticeably at the end of 2007, with a strong likelihood that we were in for several quarters of faster price rises, only reinforced the need for a credible and prompt response by monetary policy. in april, there was considerable uncertainty surrounding the outlook given the powerful forces at work pulling in opposite directions. on the one hand, the tightening of financial conditions, including some tightening of credit standards for more risky borrowers, was acting to dampen spending. in addition, developments in the global credit system were a likely dampener for the international and domestic outlooks. on the other hand, the rise in australia ’ s terms of trade that was in train was the biggest such event for many years. it was starting to deliver a very large further boost to income and, potentially, to spending. so while there were signs in april that a slowing in demand had begun, it was unclear what the extent and duration of that slowing would be. but overall, the judgement we had reached at that time, and subsequently spelled out in the may statement on monetary policy, was that growth in demand and gdp during 2008 would turn out to be considerably lower than had been recorded for 2007. this forecast was at the lower end of the range of private - sector forecasts made at that time. that in turn led us to believe that pressure would be taken off productive capacity and that inflation would, in time, abate

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