“It’s Really Bad, But Economy In Strong Shape,” Says Rudd

Oct 09, 2008

Kevin Rudd, has said the international financial situation is “really bad, let’s not mince words about it”.

But the Prime Minister emphasised the soundness of the Australian banking system, referring to a report from the World Economic Forum. He said: “Australia is ranked fourth out of 134 and to put that into context the UK ranks at number 44, the United States number 40 and Germany at number 39.”

Rudd said that the financial crisis would have a direct impact on superannuation funds.

The Prime Minister spoke this afternoon at a press conference with the Deputy Prime Minister, Julia Gillard.

  • Listen to Rudd and Gillard’s press conference:

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Filed Under: Audio, Audio2008, Economy, Reserve Bank, Rudd Government Tagged With: , , , , ,

Reserve Bank Cuts Interest Rates By One Percent

Oct 07, 2008

The Reserve Bank of Australia has confounded economic pundits by announcing a cut of one full percentage point in interest rates.

The cash rate has been cut from 7% to 6%. The common prediction in recent days had been for a 0.5% cut.

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Filed Under: Reserve Bank Tagged With: , ,

Interest Rates Up Again

Mar 04, 2008

The Reserve Bank of Australia today increased interest rates by a further 0.25%.

The increase takes the cash rate to 7.25%.

It is the second consecutive increase this year. Interest rates are now at a 12-year high.

Listen to Kevin Rudd and Wayne Swan discuss the increase at a press conference this afternoon:

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Filed Under: Audio, Reserve Bank, Rudd Government Tagged With: , , ,

Reserve Bank Increases Interest Rates

Feb 05, 2008

The Reserve Bank of Australia has increased the cash rate by 0.25% to 7.00%.

In a statement accompanying the decision, the Governor of the Reserve Bank, Glenn Stevens, said the Board had “concluded that a tighter monetary policy setting was needed now”.

Stevens cited “significant inflation pressures”, a “slowing” world economy and “fragile” sentiment in international capital and equity markets as the main reasons for the increase.

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Filed Under: Reserve Bank, Rudd Government Tagged With: , , ,

Rudd Government Strengthens Independence Of The Reserve Bank

Dec 06, 2007

Following its first Cabinet meeting in Brisbane, the Rudd Labor Government has announced measures aimed at strengthening the independence of the Reserve Bank of Australia.

The measures include raising the positions of Governor and Deputy Governor to the same level of statutory independence as the Commissioner of Taxation. Future appointments of the Governor and Deputy Governor will continue to be made by the government of the day but terminations will require parliamentary approval.

Appointments to the board of the Reserve Bank will be made from a register of candidates compiled by the Governor of the Bank and the Secretary to the Treasury.

Transparency measures already introduced by the Bank form part of the changes. Board minutes will be published and a statement of reasons will be provided each month, irrespective of whether there has been an adjustment in the cash rate.

This is the text of a joint media release from the Prime Minister, Kevin Rudd, and the Treasurer, Wayne Swan:

Rudd Government Announces New Era of Independence for RBA

Today’s release of a new Statement on the Conduct of Monetary Policy represents a new era of independence and transparency for the Reserve Bank.

The Statement outlines a mutual understanding on the conduct of monetary policy between the new Government, represented by the Treasurer, and the Governor as Chairman of the RBA Board.

The Statement delivers on the Rudd Government’s election commitment to strengthen the independence of the Reserve Bank and will enhance the transparency of the conduct of monetary policy in Australia.

Strengthening the independence of the Reserve Bank is a critical element of the Government’s commitment to putting downward pressure on inflation.

The new Statement does this through a number of reforms agreed between the Treasurer and the Governor.

To enhance the independence of the Reserve Bank, the positions of Governor and Deputy Governor will be raised to the same level of statutory independence as the Commissioner of Taxation and the Australian Statistician.

The appointments of Governor and Deputy Governor will be made by the Governor-General in Council and their terminations will require parliamentary approval. Currently the Governor and the Deputy Governor are appointed by the Treasurer and their appointment can be terminated by the Treasurer.

The Rudd Government is committed to improving the transparency of future Reserve Bank Board appointments and to remove political considerations.

Accordingly, the Secretary to the Treasury and the Governor of the Reserve Bank will maintain a register of eminent candidates of the highest integrity from which the Treasurer will make appointments to the Reserve Bank Board.

The new Statement also incorporates the transparency measures announced by the Governor yesterday including the publication of Board minutes, and a statement of reasons for the decision following each monthly meeting irrespective of whether there is an adjustment in the cash rate.

Today’s announcement is an important step towards ensuring the appointment processes, debates and decision making of the RBA are as independent and transparent as possible.

This is the text of a the statement from the Treasurer, Wayne Swan, and the Governor of the Reserve Bank of Australian, Glenn Stevens.

STATEMENT ON THE CONDUCT OF MONETARY POLICY

This statement records the common understanding of the Governor, as Chairman of the Reserve Bank Board, and the Government on key aspects of Australia’s monetary policy framework.

Since the early 1990s, inflation targeting has formed the basis of Australia’s monetary policy framework. Since 1996, this framework has been formalised in a Statement on the Conduct of Monetary Policy.

Monetary policy is a key element of macroeconomic policy and its effective conduct is critical to Australia’s economic performance and prospects. For this reason, it is appropriate and timely for the Governor, and the Treasurer on behalf of the new Government, to outline their mutual understanding of the operation of monetary policy in Australia.

This statement should continue to foster a better understanding, both in Australia and overseas, of the nature of the relationship between the Reserve Bank and the Government, the objectives of monetary policy, the mechanisms for ensuring transparency and accountability in the way policy is conducted, and the independence of the Reserve Bank.

Relationship between the Reserve Bank and the Government

The Reserve Bank Act 1959 (the Act) gives the Reserve Bank Board the power to determine the Reserve Bank’s monetary policy and take the necessary action to implement policy changes. The Act nominates the Governor as Chairman of the Reserve Bank Board.

The Government recognises the independence of the Reserve Bank and its responsibility for monetary policy matters and will respect the Reserve Bank’s independence as provided by statute.

The Government will implement two new initiatives to further enhance the Reserve Bank’s independence.

The positions of the Governor and Deputy Governor will have their level of statutory independence raised to be equal to that of the Commissioner of Taxation and the Australian Statistician. As such, their appointments will be made by the Governor-General in Council, and could be terminated only with the approval of each House of the Parliament in the same session of Parliament.

The Secretary to the Treasury and the Governor will maintain a register of eminent candidates of the highest integrity from which the Treasurer will make new appointments to the Reserve Bank Board. This procedure removes the potential for political considerations in the appointment process and ensures only the best qualified candidates are appointed to the Reserve Bank Board.

Section 11 of the Act prescribes procedures for the resolution of policy differences between the Reserve Bank Board and the Government. The procedures, in effect, allow the Government to determine policy in the event of a material difference; but the procedures are politically demanding and their nature reinforces the Reserve Bank’s independence in the conduct of monetary policy. Safeguards like this ensure that monetary policy is subject to the checks and balances inherent and necessary in a democratic system.

In addressing the Reserve Bank’s responsibility for monetary policy, the Act provides that the Reserve Bank Board shall, from time to time, inform the Government of the Reserve Bank’s policy. Such arrangements are a common and valuable feature of institutional systems in other countries with independent central banks and recognise the importance of macroeconomic policy co-ordination.

Consistent with its responsibilities for economic policy as a whole the Government reserves the right to comment on monetary policy from time to time.

Objectives of Monetary Policy

The goals of monetary policy are set out in the Act which requires the Reserve Bank Board to conduct monetary policy in a way that, in the Reserve Bank Board’s opinion, will best contribute to:

(a) the stability of the currency of Australia;

(b) the maintenance of full employment in Australia; and

(c) the economic prosperity and welfare of the people of Australia.

The first two objectives lead to the third, and ultimate, objective of monetary policy and indeed of economic policy as a whole. These objectives allow the Reserve Bank Board to focus on price (currency) stability while taking account of the implications of monetary policy for activity and, therefore, employment in the short term. Price stability is a crucial precondition for sustained growth in economic activity and employment.

Both the Reserve Bank and the Government agree on the importance of low inflation and low inflation expectations. These assist businesses in making sound investment decisions, underpin the creation of jobs, protect the savings of Australians and preserve the value of the currency.

In pursuing the goal of medium-term price stability, both the Reserve Bank and the Government agree on the objective of keeping consumer price inflation between 2 and 3 per cent, on average, over the cycle. This formulation allows for the natural short-run variation in inflation over the cycle while preserving a clearly identifiable performance benchmark over time.

Since the adoption of inflation targeting in the early 1990s inflation has averaged around the midpoint of the inflation target band. The Governor takes this opportunity to express his continuing commitment to the inflation objective, consistent with his duties under the Act. For its part the Government indicates that it endorses the inflation objective and emphasises the role that disciplined fiscal policy must play in achieving such an outcome.

Transparency and Accountability

Monetary policy needs to be conducted in an open and forward looking way. A forward looking focus is essential as policy adjustments affect activity and inflation with a lag and because of the crucial role of inflation expectations in shaping actual inflation outcomes. In addition, with a clearly defined inflation objective, it is important that the Reserve Bank continues to report on how it sees developments in the economy, currently and in prospect, affecting expected inflation outcomes. These considerations point to the need for effective transparency and accountability arrangements.

The Reserve Bank takes a number of steps to ensure the conduct of monetary policy is transparent. Changes in monetary policy and related reasons are clearly announced and explained. The Reserve Bank’s public commentary on the economic outlook and issues bearing on monetary policy settings, through public addresses, its quarterly statements on monetary policy and monthly bulletins, have been crucial in promoting increased understanding of the conduct of monetary policy. The Reserve Bank will continue to promote public understanding in this way.

The Governor has also indicated that he plans to continue the practice of making himself available to report on the conduct of monetary policy twice a year to the House of Representatives Standing Committee on Economics, Finance and Public Administration.

The Governor has announced that the Reserve Bank Board will release a statement explaining the reasons behind its decision on monetary policy following each meeting, irrespective of whether there is a change in the cash rate target. This statement will be made on the afternoon of the day of each Board meeting (rather than the morning of the following day), with the minutes of the Board meeting being released publicly as soon as possible after the meeting.

The Governor has also indicated that the Reserve Bank will continue to extend the scope of the economic forecasts in its quarterly statement on monetary policy to enhance public understanding of the conduct of monetary policy.

The Treasurer expresses support for these arrangements, which bring the transparency and accountability of the Reserve Bank’s conduct of monetary policy into line with international best practice, further enhancing the public’s confidence in the independence and integrity of the monetary policy process.

Filed Under: Public Service, Reserve Bank, Rudd Government Tagged With: , , , ,

Reserve Bank Holds Interest Rates But Still Concerned About Inflation

Dec 05, 2007

The Reserve Bank of Australia has held interest rates at current levels but expressed concern about inflation tendencies in the economy.

Following the Reserve’s board meeting yesterday, the cash rate remains unchanged at 6.75%.

The Governor of the Reserve Bank, Glenn Stevens, said: “The Board remains concerned about the outlook for inflation.”

This is the text of the statement from the Reserve Bank:

STATEMENT BY GLENN STEVENS, GOVERNOR

MONETARY POLICY

At its meeting yesterday, the Board decided to leave the cash rate unchanged at 6.75 per cent. As part of wider changes to communication practices which the Board has adopted (see separate announcement on communication), it was further decided that a statement explaining the decision would be released.

Recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity. Inflation on a year ended basis, as measured by the CPI and underlying measures, is likely to be above 3 per cent in the first half of 2008, and to decline somewhat thereafter.

Sentiment in global credit markets has deteriorated recently after an earlier improvement and prospects for growth in the major economies appear to be weakening. It is unclear to what extent that will affect Asia, where conditions at this point look quite strong. But overall, it now appears likely that global growth will be closer to trend in 2008, after several years of above trend growth. High prices for food, energy and natural resources, however, continue to pose a significant risk to inflation around the world.

In Australia, the pressures arising from the global financial turmoil have been less pronounced than elsewhere, and the flow of credit to sound borrowers does not appear to have been impaired. Nonetheless borrowing costs have risen appreciably since mid year, particularly for business borrowers, as a result both of changes in monetary policy and market-driven increases in funding costs for intermediaries. Depending on conditions in wholesale markets in the near term, some further rise in rates charged to borrowers may yet occur. These developments will help to contain private demand over the period ahead.

The Board remains concerned about the outlook for inflation. But given the heightened uncertainty about the international outlook and the local trends in wholesale borrowing costs, both of which could have a bearing on inflation over the medium term, it judged that the current stance of monetary policy should be maintained for the time being.

Filed Under: Reserve Bank, Rudd Government Tagged With: , ,

Liberal Party Campaigns On Economic Management

Nov 07, 2007

Following the interest rate increase announced by the Reserve Bank, the Liberal Party has maintained its election campaign emphasis on economic management.

An email sent to subscribers after the interest rate announcement reiterates the coalition’s “proven record of economic management”, contrasting this with “the prospect of the most inexperienced and union-dominated government in a generation”.

This is the text of the subscriber email from the Liberal Party, following the interest rate increase.

THE IMPORTANCE OF STRONG ECONOMIC MANAGEMENT

Our economy is experiencing increasing external pressures.

The Coalition’s commitment is to protect Australia and our way of life against these pressures.

The Reserve Bank’s decision on interest rates further highlights the need for strong, careful management to secure our economy and grow Australia’s prosperity in the years ahead.

Australians face a clear choice at the coming election:

An experienced Coalition team with a proven record of strong economic management,

or

The prospect of the most inexperienced and union-dominated government in a generation managing our economy and interest rates.

Filed Under: 2007 Federal Election, Howard Government, Liberal Party, Reserve Bank Tagged With: , ,

Reserve Bank Lifts Interest Rates By 0.25%

Nov 07, 2007

The Reserve Bank has announced a 25 basis points increase in the cash rate to 6.75%.

The interest rate increase is the first to ever take place during an election campaign.

It is the sixth increase in interest rates since the 2004 election.

This is the text of the statement on monetary policy by the Governor of the Reserve Bank, Glenn Stevens.

Glenn Stevens, Governor of the Reserve Bank of Australia At its meeting yesterday, the Board decided to increase the cash rate by 25 basis points to 6.75 per cent.

Inflation in Australia has increased. Underlying inflation was 0.9 per cent in the September quarter and close to 3 per cent over the past year. The annual pace of CPI inflation was lower, but this reflected two very low quarterly results nearly a year ago, as well as recent changes to the treatment of child care costs. By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent.

During 2007, the pace of growth of demand and output has also increased. There are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist. Growth in labour costs has been contained so far, and high levels of investment are adding to productive capacity in some sectors. The rise in the exchange rate will help to contain pressure on prices. But growth in aggregate demand will, nonetheless, need to moderate if inflation is to be kept to 2-3 per cent in the medium term.

In reaching its decision, the Board continued to look carefully at developments in international financial markets. Conditions have improved over the past couple of months, but confidence remains fragile. Funding costs for intermediaries remain elevated relative to official interest rates, and capital market conditions are still difficult, in several major countries. This is likely to result in some moderation in growth in those countries in 2008, and forecasts for global growth have been revised down accordingly. The world economy is still expected to grow at an above-average pace, however, led by strong growth in China and other parts of Asia. High global commodity prices remain an important source of stimulus to Australian spending and activity.

In Australia, the tightening in credit conditions resulting from the global turmoil has been less pronounced than elsewhere. Wholesale funding costs have risen a little compared with official rates, and some borrowers have experienced an increase in interest costs as a result, but the flow of credit to sound borrowers does not appear to have been impaired.

Having weighed both the international and domestic information available, the Board judged that a further increase in the cash rate was needed now in order to contain inflation in the medium term.

Filed Under: 2007 Federal Election, Howard Government, Reserve Bank Tagged With: , ,

Reserve Bank Raises Interest Rates 0.25%

Aug 02, 2006

The Reserve Bank of Australia has increased the cash rate by 25 basis points to 6%.

Widely predicted, the 0.25% increase in interest rates is the third rise since the re-election of the Howard government in 2004.

This is the statement from the Governor of the Reserve Bank, Ian Macfarlane.

Following a decision taken by the Board at its meeting yesterday, the Bank will be operating in the money market this morning to increase the cash rate by 25 basis points, to 6.0 per cent. The decision reflects the Board’s assessment that economic activity remains strong and that inflation pressures have increased.

Growth of the Australian economy is taking place against the background of strong international conditions. The world economy is in its fourth successive year of above-average growth, and official and private-sector forecasts are that this will continue next year, despite some moderation in the United States. The general strength of the global economy has been reflected in further increases in commodity prices since the start of the year. These increases have been broadly based and are adding to the growth in Australia’s national income and spending.

Despite regional differences, most indicators suggest that demand and output in Australia have strengthened over recent months. A favourable business climate, strong profitability and high levels of capacity usage are contributing to rapid growth in investment spending. Even with moderate growth in household spending, this has underpinned a solid rate of expansion in domestic demand and a pick-up in employment over recent months.

Strong demand for finance over the past few months indicates that households and businesses have continued to find it attractive to borrow at recently prevailing interest rates. Compression of lending margins over recent years has contributed to a lowering of borrowing costs relative to the cash rate. This has meant that although the cash rate has recently been slightly above its average for the low-inflation period since 1993, interest rates paid by borrowers have remained below average.

The growth of demand, against the background of an economy operating with limited spare capacity, has contributed to increased inflationary pressures this year, and businesses report that labour market conditions are tight. Raw materials costs have picked up as a result of broad-based increases in global commodity prices, and there has been a more general pick-up in output prices at all stages of production.

These pressures have also been evident in underlying consumer price inflation. In the June quarter, underlying inflation is estimated to have picked up to a rate of just under 3 per cent, confirming the upward drift that had started to become apparent in the previous quarter. Although the increase in the headline CPI was much larger, reflecting fuel price increases and a sharp rise in the price of bananas in the wake of Cyclone Larry, the Board recognises that it is necessary to abstract from temporary influences in forming its policy assessments. Overall the Board’s assessment, based on the gradual increase in underlying inflation this year, and the wider background of above-average global growth and strong domestic demand, was that underlying inflation in the period ahead was likely to exceed previous forecasts.

Given these circumstances, the Board judged that an increase in the cash rate was warranted in order to contain inflation in the medium term.

Filed Under: Howard Government, Reserve Bank Tagged With:

Reserve Bank Hints At Interest Rate Increase

Feb 07, 2005

Reserve Bank of AustraliaThe Reserve Bank of Australia said today that “the likelihood of further monetary tightening being required in the months ahead had increased”.

The statement comes in a Statement on Monetary Policy issued by the Reserve Bank today.

Interest rates were a key issue in last year’s federal election. A rise in rates in the coming months would cast doubt on statements made by the Prime Minister and the Treasurer during the election campaign.

This is the first chapter of the Reserve Bank’s Statement on Monetary Policy

Introduction

After a strong year in 2004 the world economy retains momentum, with growth continuing to be led by the United States and China. Recent data for the US have confirmed that the economy is expanding at a good pace and is generating solid gains in employment. China’s economy has become an increasingly important driver of world growth, with last year’s growth outcome of nearly 10 per cent exceeding most expectations. In other parts of the world, including Japan and the euro area, the economic recovery is continuing, though at a slower pace than in the first half of 2004. Despite some slowing, growth remains quite strong in most of the smaller east Asian economies. The tsunami disaster is unlikely to have a major impact on aggregate GDP in the Asian region but will reduce growth in the short term in Indonesia and Thailand, as well as in some smaller economies on the Indian Ocean rim. Overall, most observers expect growth of the world economy, though not as strong as last year, to continue in 2005 at an above-average pace for the third successive year.

The strong global economy has contributed to upward pressure on commodity prices in the past couple of years. One important aspect of this was the sharp rise in oil prices, which peaked in October last year. While the rise in oil prices was seen as primarily a consequence of strong global demand, supply disruptions also played a role, and much attention last year was focused on the possible impact that higher prices might have on global economic performance. With oil prices in recent months having fluctuated in a range somewhat below their October peak, risks to the global economy from that source appear to have lessened.

Prices of a range of other mineral commodities have generally remained firm or increased further over recent months. For Australia, this is providing a significant stimulus to national income and spending, with the prospect of more to come. World prices of Australia’s base metals exports are now around 40 per cent higher than they were two years ago. For iron ore and coal, substantial increases in contract prices are set to take effect later this year, building on the already sharp increases of last year. In addition to boosting incomes and spending in Australia, the effects of rising commodity prices are also being seen in producer prices more generally.

In international financial markets the main development recently has been the continued decline in the US dollar. In the final three months of last year the US dollar declined by 8 per cent against the euro and 7 per cent against the yen, to be around its lowest level in the past decade. Since the beginning of 2005, the US dollar has recovered somewhat against the euro, but has remained around its recent lows against the yen and other Asian currencies. Movements in the US dollar have continued to be the major influence on the Australian dollar over the past few months. The domestic currency has generally traded in a range of US76 to US79 cents, and is around the middle of that range at present. The Australian dollar’s movement against other floating currencies has been modest.

Given the strength of the US economy, the Federal Reserve has further tightened monetary policy and financial markets expect this to continue. Even so, US government bond yields have remained remarkably stable at around 4¼ per cent. In Australia, market yields, particularly at the short end, have risen since early December, reflecting stronger employment and prices data.

Most economic data in Australia have continued to suggest strong conditions recently. Particularly noteworthy in recent months has been the performance of the labour market, with employment posting a series of big increases and the unemployment rate declining to its lowest level since the 1970s. In addition, most business surveys reported conditions that were at high levels throughout 2004, while consumer confidence has been close to record levels. The high level of confidence was also reflected in the Australian share market, which outperformed the markets of all other major countries during 2004. Overall, while the national accounts had reported a surprisingly weak outcome for growth in the September quarter, the range of other available information suggests that the economy was in a strong condition through last year and is likely to have maintained a good pace of growth entering 2005. With a favourable international environment, high levels of confidence domestically, and further rises in the terms of trade adding to national income, the prospects are that demand conditions will continue to encourage growth in the period ahead.

Given these conditions, a key issue for the Australian economy will be the extent to which the ongoing growth of demand might give rise to capacity constraints and, consequently, upward pressure on wage and price inflation. With the expansion now in its fourteenth year, there is clearly much less spare capacity available than was the case in its early stages. The general performance of the economy in 2004, when production was unable to keep up with the strength of global and domestic demand, is suggestive that capacity constraints may be becoming more important.

The clearest indication of emerging pressures on capacity has been in the disappointing performance of exports to date, which has been associated with a widening of Australia’s current account deficit. While there has been a modest recovery in export volumes from the trough reached in mid 2003, this has so far only lifted exports back to around their level at the start of the decade. One factor likely to have contributed to this disappointing performance is the strong growth of domestic demand over recent years, which may have adversely affected manufactured and service exports. Additionally, there are a number of areas in the mining sector where supply bottlenecks have held back export growth recently, though there are indications that capacity expansions in that area are now in train.

Inflation outcomes during 2004 were higher than had been expected at the start of the year. The CPI increased by 0.8 per cent in the December quarter and by 2.6 per cent over the year. This was boosted by rising petrol prices, so that underlying measures were somewhat lower, generally around 2¼ per cent over the year. For the past couple of years, underlying inflation has been held down by the lagged effects of the exchange rate appreciation that took place during 2002 and 2003, but the maximum impact from that source has now passed. Hence it is likely that underlying inflation has now reached its low point and that it will start rising during 2005. Domestically-sourced inflation has been running faster over the past couple of years and there has been a significant pick-up in domestic producer prices recently, associated with rising materials costs and strong demand pressures in some sectors. At this stage, the overall rise in inflation over the next two years is forecast to be gradual, with inflation in both headline and underlying terms expected to be around 3 per cent by the end of 2006. However, given the firm demand conditions in prospect, the possibility that wage and price pressures will build more quickly cannot be ruled out.

The adjustment in the Australian housing market during 2004 should assist prospects for sustainable economic growth, with the decline in house prices and new lending during much of the year alleviating the overheating which had previously been apparent in that part of the economy. More recently, there have been some signs of prices and finance levelling out, or possibly rising. Data on house prices for the December quarter were a little firmer than earlier in the year, and the demand for housing finance picked up towards the end of the year. It is too early, however, to tell whether these latest developments represent a significant change in trend.

The cooling in the housing market during 2004 was associated with an easing in credit growth to the household sector from the exceptionally high rates seen in the previous year. Nevertheless, the growth of credit to both the household and business sectors remains high, with aggregate credit growth still running at an annual rate of 12 per cent over the six months to December 2004. The overall strength in demand for credit, combined with the fact that interest rates remain slightly lower than the average of recent years, continues to suggest that the current policy setting is not inhibiting the growth of the economy.

In its recent policy deliberations the key focus of the Board has been on whether continuing strength of demand conditions would give rise to significant inflation pressures. At its December meeting, as in earlier months, the Board judged that a further tightening of monetary policy would probably be required in due course, but that there was no need for action in the short term. Information becoming available over the subsequent two months for the February meeting tended to confirm the strength of both domestic and international demand, and gave early signs of a pick-up in inflation, as had been expected.

At this stage, the Board’s judgement is still that this pick-up in inflation will be quite gradual, with inflation reaching 2½ per cent this year and 3 per cent next year. Nonetheless, continued pressure on raw materials prices, evidence of capacity constraints in some sectors and reports of higher employment costs – notwithstanding the steadiness to date of aggregate series for wages – constitute a risk that this forecast could prove to be too low. On balance, the Board decided at its February meeting to leave interest rates unchanged, while noting that the likelihood of further monetary tightening being required in the months ahead had increased. The Board will continue to monitor developments over coming months and will respond as necessary to ensure that rising inflation does not jeopardise the sustainable expansion of the Australian economy.

Filed Under: Reserve Bank Tagged With: