surprising given the relatively healthy profit situation, the high level of business confidence and the expected growth in spending. these more buoyant conditions may also encourage businesses to attempt to rebuild profit margins, which will be a factor underpinning inflation over the next year or so. thus, we believe that if monetary policy maintained its present stance for too much longer, there is little risk of a serious slowdown, but a high risk that the economy in time would overheat. this provides the basis for our view that monetary policy should be returned to a more neutral setting. i think there is widespread agreement with this assessment of the situation, but inevitably there will be people who do not agree. one doubt you sometimes see expressed is the fear that any rise in interest rates will “ choke off the expansion ”. not surprisingly, we feel that this fear is misplaced. at one level, it amounts to saying that the expansion is so fragile that it can only be continued if monetary policy is kept permanently at an expansionary setting. we also care about continuing the expansion, but feel that the least risky way of doing so is with a more neutral interest rate setting. at another level, the fear may be that we at the reserve bank will err on the tight side. of course, that is possible, but our track record does not support this view. over the past decade or so, the thing that stands out about our monetary policy is the fast rate of economic growth it has permitted compared with other comparable countries, not any tendency to over - achieve with inflation reduction. where we differ from some observers is that we are mainly interested in the medium run, i. e. we want to sustain the expansion rather than to maximise its speed over the next year. we have been consistent in this approach for the best part of a decade, and it has served us well. i would now like to change to a subject that was highlighted by this committee in its press release announcing today ’ s hearing, namely credit card reform. the reserve bank released its consultation document in december last year. in it, we proposed, subject to further consultation, three major changes to the four party credit card schemes that operate in australia : – first, a new and transparent standard for setting the interchange fees on credit card transactions which would lead to a reduction in those fees, and thus in the merchant service fees paid by businesses ; – second, the ending of the prohibition imposed by the card schemes that prevents merchants from passing the

i j macfarlane : overview of the australian economy opening statement by mr i j macfarlane, governor of the reserve bank of australia, to the house of representatives standing committee on economics, finance and public administration, sydney, 31 may 2002. * * * mr chairman, with the normal timetable interrupted by last november ’ s election, it is slightly over a year since we appeared before this committee. since it has been an extremely eventful year, i will have a fair bit of work to do today to fill the gap. looking back over the hansard of the last meeting in may 2001, i see that i was explaining why we had lowered interest rates three times ( in february, march and april ). at the time of our meeting, i was pretty confident that the australian economy was on a recovery path after a short housing - induced setback in the second half of 2000, but none of us were sure about what was going to happen in the united states and the rest of the world. external events were seen to be crucial to our fortunes and to the evolution of our monetary policy. as it turned out, these events unfolded in two distinct phases : – over the rest of 2001, the world economy continued to weaken. the united states had a mild recession, with consumer spending holding up and so preventing it from being as deep as earlier ones. on the other hand, the business sector had a pronounced recession judging from the fall in industrial production, business investment and corporate earnings. most other major countries had negligible growth during the year, so that for the g7 countries as a whole, growth was virtually zero over the year. even so, it looked for a time that it could have been much worse. for most of last year, therefore, we were receiving gloomy news on the world economy. after a brief respite in mid - year, bad news began to re - emerge in july - august, so much so that we in australia eased monetary policy on 5 september. then the events of 11 september induced a new bout of gloom, and there was a real fear that the world economy would weaken further in 2002 and so experience a prolonged and deep recession. monetary policy was eased virtually everywhere. in our case, even though our own economy remained in good shape, we eased in anticipation that the weakening prospects for the world economy would eventually flow through to the domestic economy. – the second phase began in the early months of this year, when it became increasingly clear that our