i j macfarlane : economic growth, inflation and monetary policy in australia 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, in wagga wagga on 1 december 2000. * * * i would like to start by endorsing the remarks of the chairman and saying what a pleasure it is to be in wagga wagga for the first hearing to be conducted outside sydney, melbourne or canberra. like you, mr chairman, i think it sets a good precedent for future meetings, even if it does represent a cautious start, given that wagga wagga is half - way between melbourne and sydney and not that far from canberra. perhaps the committee will be more adventurous in its future choices. i would also like to record our thanks to the mayor of wagga wagga and his colleagues and to kay hull ( a member of this committee ) for their hospitality earlier this morning. as usual, i would like to start by reviewing the forecasts i put before the committee at the previous meeting in melbourne in may. starting with economic growth, you may recall that the australian economy grew by about 4½ per cent per annum in 1997, 1998 and 1999, and, as usual, we were expecting a modest slowdown in the year to june 2000. the forecast i put forward for that period was 4 per cent, and the outcome was 4. 7 per cent, continuing our tradition of modest underestimates of economic growth. for the year to june 2001, i said that we had no quibble with the figure of 3¾ per cent contained in the budget papers, nor would we quibble with the recent update which puts it at about 4 per cent. it is largely a matter of rounding, and not much should be made of small differences : the figure is meant to suggest again some modest slowing from past growth rates. i would note that the number for gdp growth involves a substantial slowdown in final domestic demand – from about 6 per cent growth to about 3 per cent – which is mostly offset by a further swing in net exports into positive territory and the assumption that the inventory rundown recorded over the past year does not occur again. on inflation, the story is a little more complicated. last time we met, i said i expected the cpi to rise by 3 per cent in the year to june 2000 – the actual outcome was 3. 2 per cent. not a very big difference

widespread use of overdrafts in italy, much greater than in almost all the other euro - area countries, should prompt a rethinking of their utilization. firms need to consider more efficient and less costly methods for managing liquidity ; they should also weigh the advisability of greater resort to fixed - term loans. banks must guarantee that the liquidity management services embodied in current account overdrafts do not cost more than their effective value, and they must also take account, in their pricing, of the indirect advantages they reap from the provision of these services. in fact, when the counterparties are small firms, the information asymmetry between banks and firms is more severe, and managing the firms ’ liquidity enables banks to gather further information, thereby attenuating the risks connected with difficulties and uncertainty over the timing of credit recovery procedures. in august the bank of italy opened consultation on a draft of the resolution to be submitted to the credit committee on the implementation of the newly revised article 120 of the consolidated law on banking, which governs accrual of compound interest on banking transactions. our proposal – prepared as required by the law – is intended as a clarification in the interests of transparency of the rules. it is based on a reading of the law that is shared by the ministry of economy and finance. the solutions set out implement the principle established by the law, namely the ban on compound interest on banking transactions, in keeping with the economic substance of contractual relationships and avoiding uncertainty and any effect on debtors that is contrary to the intentions of the legislature. the most technically complex case to regulate is the current account overdraft, which, as i just now noted, is a much more common form of credit in italy than elsewhere. since the law states that banks cannot require the automatic settlement of the interest due on overdrafts, we have had to create a framework of legal certainty to cover situations in which the customer lacks – even temporarily – the liquidity needed to pay the interest on the due date. the proposal settles this issue by forbidding banks from taking immediate action. it allows the payment of interest by debiting the account, after a period of 60 days has elapsed, only at the request of the customer, who has an interest in allowing payment in order to avoid the legal and practical consequences of non - performance that he could otherwise suffer, including default penalties and revocation of the credit line where the requisite conditions apply