i j macfarlane : overview of the australian economy opening statement by mr i j macfarlane, governor of the reserve bank of australia, to house of representatives standing committee on economics, finance and public administration, warrnambool, 6 december 2002. * * * i would like to endorse the remarks of the chairman and say what a pleasure it is to be in warrnambool, for the second hearing to be conducted outside the sydney - melbourne - canberra triangle. the first was in wagga wagga, and i remember at the time suggesting that the second should be a little further away from canberra. warrnambool passes that test and is an important agricultural and tourist centre, so it is a fitting venue for this meeting. i would also like to thank the mayor of warrnambool, councillor james nicol, for his hospitality in hosting a civic reception for the committee and the members of the bank appearing before it. i would like to start the substance of this statement by observing that in the six months between this hearing and the previous one in may quite a lot has changed, and this has had an important influence on our judgment about what we have needed to do with monetary policy. this change has happened relatively steadily, with the result that the financial markets and the public more generally have had no trouble in adjusting to the changed outlook. we have assisted, where we thought necessary, by way of several speeches and articles on the subject over the past six months ; they have probably helped at the margin, although i think the public was not having any difficulty in recognising the changing outlook as it unfolded. that being so, it could be argued that there is nothing further to add on the subject. however, i am very aware of the fact that i gave some quite frank indications about the expected future direction of monetary policy at the previous hearing, and that those indications have not been followed through. so i would like to place on the record before this committee another account of the changing circumstances, even at the risk of being accused of going over old ground. in may i said to this committee that since the australian economy was behaving normally, and the world economy was getting back to normal, unless unforeseen developments intruded, we should continue the process of getting real interest rates back to normal, while all the time carefully examining incoming data, both from here and abroad, to ensure that developments remained on track. we did continue the process of getting

should increase the resources sector ’ s export revenue. the combination of higher revenues and lower capital expenditure outlays could be expected to lead to an increase in resources sector profits and, particularly, an increase in the share of these profits that are paid out as dividends to investors. given that the resources sector is largely foreign - owned, this would be accompanied by an increase in dividend payments to foreign investors ( an outflow on the net income component of the current account ). although the resources sector ’ s transition from investment to production will likely result in a reduction in net capital inflows to the sector, the effect on the australian dollar is more nuanced. while capital inflows to the resources sector may be expected to fall ( and thus reduce demand for australian dollars ), this will also be associated with declining imports to the sector, as resource investment has relied heavily on imported capital and labour. moreover, the balance of payments records these notional foreign direct investment flows as capital inflows ( and imports on the current account ) even though the respective flows may have been predominantly in us dollars. the ( still substantial ) part of the capital inflow that represented an actual transaction in australian dollars was that needed to pay for their workforce in australia and the often small share of the assembly done locally. additionally, to the extent that resource firms ’ revenues are primarily denominated in us dollars and their shareholder base chooses to be paid dividends denominated in us dollars, these flows will have no net direct influence on the exchange rate. only those flows needed to pay for the operations in australia, to pay dividends to the australian shareholder base and taxes to the australian government will result in purchases of australian dollars. the net result of all of this is that we might expect to see reduced capital flows and reduced demand for australian dollars as the resources sector moves into the production phase. finally, on the outlook for investment inflows to the public sector, while the foreign ownership share of australian government debt has declined somewhat from its peak, it remains at a historically high level. sovereign investors tend to be relatively slow to change their portfolio allocations. hence we might expect these holdings to be relatively sticky. recent capital inflows to the sector suggest that demand for australian government debt remains robust. the extent of any additional purchases will depend in part on the extent of further foreign exchange reserve accumulation by other central banks. one source of potential additional demand for government securities is from japanese investors, who