Media Release Statement by the Governor, Mr Ian Macfarlane: Monetary Policy

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 5.5 per cent.

For some time the Bank has been signalling that the cash rate would probably need to be moved higher during the current expansion. The decision to do so in March took into account the following main considerations:

• The Australian economy is now in the fourteenth year of an expansion which has made substantial inroads into the economy's surplus productive capacity. Over recent months, it has become increasingly clear that remaining spare capacity in the labour and goods markets is becoming rather limited.
• This is now starting to result in stronger inflationary pressures. Price increases at the producer level picked up appreciably at all stages of production during the second half of 2004. Consumer price inflation, although currently consistent with the target, was higher than had been expected, and is forecast to increase to around 3 per cent by the end of next year. Continued pressure on raw materials prices, constraints on capacity and reports of higher employment costs – notwithstanding the steadiness to date of aggregate wage measures – constitute a risk that this forecast will prove to be too low.
• Although Australia's GDP slowed during 2004, this does not appear to have reflected any deficiency in domestic or global demand. Domestic spending has been growing strongly for some time and the global economy last year grew at its fastest pace in more than a decade.
• Conditions prevailing in Australia and abroad are likely to continue to encourage spending growth in the period ahead. The world economy is growing at a faster-than-average pace and world commodity prices are rising. In Australia, there are high levels of confidence in both the business and household sectors, credit growth is providing ample support for spending, employment is growing strongly and national income and spending will continue to be boosted this year by the rising terms of trade.

In these circumstances, the Board judged that an increase in the cash rate was warranted in order to reduce the risk of an unacceptable rise in inflation in the medium term.