mr macfarlane ’ s overview of monetary policy in australia opening statement by the governor of the reserve bank of australia, mr i j macfarlane, to the house of representatives standing committee on economics, finance and public administration, in melbourne, australia on 17 june 1999. thank you, mr chairman. it is a pleasure to be here in melbourne again appearing in front of the committee. like last time, the semi - annual statement on monetary policy has already been released a month before the hearing. on this occasion, it was the budget that caused the delay in the hearing, but i do not think this is a serious matter because the statement is still relevant. if anything, the advance release of the statement may have been helpful in giving more time to digest the material contained in it. we have more recently sent to the committee some new material in the form of a paper on bank fees. i would now like to start off in my customary manner by comparing what i told you last time with what now appears to be the most likely outcome. i do this in the interests of accountability, but i also think it has the advantage of drawing out the limitations of economic forecasting and the necessity of seeing policy formulation as an iterative process. last time, i indicated our expectation that our growth rate was likely to be lower in 1998 / 99 and that there would be some pick - up in inflation ( though to a rate consistent with our target ). i said that the current account deficit would expand, and would probably reach 6 per cent of gdp on a quarterly basis at some stage. i indicated that not much further progress could be expected in reducing unemployment from the rate of 7. 9 per cent which had prevailed in the three months before the hearing. it is now well known that growth has not, as yet, declined. in all likelihood, growth for the 1998 / 99 year has been in excess of 4 per cent, measured either in year average terms or for the four quarters to june. this makes this expansion, which began in the middle of 1991, the longest continuous upswing since the 1960s. nor is there any sign yet that the expansion will come to an end soon. we are still of the view, however, that some decline in growth is likely, but from a considerably stronger starting point ( and, of course, more delayed ) than earlier thought. the outcome for calendar 1999 will, in our judgement, be lower than the growth recorded in 1998 – something between 3 and 4 per cent.

this is a fairly mild decline, given the size of the external shock to which we have been subject. more importantly, the risks of a sharp slump have lessened considerably since we last met. last december, we had just been through a period in which confidence in the prospects for the global economy, including, of course, the us economy, had reached its lowest point. behind this were concerns about extreme instability in global financial markets and the possibility of a “ credit crunch ”. since then, the us economy has continued its strong performance and concerns about credit crunches have disappeared. indeed, there is now a widespread expectation that the strength of the us economy means that a tightening of us monetary policy is on the cards. evidence has also continued to accumulate of a turn for the better in the countries in east asia which slumped so sharply during 1997 and 1998. inflation in australia, meanwhile, has risen, but very slightly and considerably more slowly than our central forecast of six months ago had suggested. a possibility which we flagged in our november 1998 statement – that competitive pressures in international markets would have a dampening impact on the rises in prices for imported goods – has in fact turned out to be the case. in our latest statement, we have forecast inflation to be about 2 per cent in underlying terms by the end of 1999. in headline terms, the cpi also is likely to be about 2 per cent. this is a little higher than we suggested in the statement, as we have now taken full account of higher international oil prices, which roughly offset the effect of the health care changes. the current account deficit has turned out to be something like 5½ per cent of gdp for 1998 / 99, and was almost 6 per cent in the march quarter. it is highly likely that a quarterly figure over 6 per cent will be recorded in the june quarter. it seems to us that numbers something like that might well be seen over the next few quarters, with the result that the outcome for 1999 as a whole will be about 6 per cent of gdp. the unemployment rate has fallen further, in line with the stronger than expected growth in the economy, and over the past three months has averaged 7. 5 per cent, its lowest for about a decade. given the amount of growth we have had over the past year, some further moderate decline in unemployment will probably be recorded, in net terms, over the remainder of this calendar year. even though the outcome has turned out better than expected, if someone wanted to