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Wednesday, 3 December 2003
Page: 23711


Mr COX (10:37 AM) —When the debate was adjourned on Monday, I had been speaking about the housing market and housing stress. Yesterday the Reserve Bank board had a meeting, and this morning at 9.30 there was another shift in monetary policy—this time an increase in the cash rate of 25 basis points. So I think it is timely to take this opportunity to consider the few points that the governor raised in his statement on monetary policy this morning and his reasons for that change in policy.

The first point that he cited was economic conditions around the world. As I said on Monday, in the middle of the year there was a substantial risk that the world economy would turn down. Events since then have given some cause for optimism—in fact enough cause for optimism last month for the governor to raise rates by a quarter of a per cent. This morning he said:

Stronger conditions have been evident in Japan, China and other parts of east Asia, and also, to a lesser extent, in Europe.

He also said:

... there is increasing evidence that the US recovery is becoming more broadly based.

So our major trading partners' economic performance is stronger and that is going to have a significant bearing on us. The governor says:

As a result of these trends the international climate, though still not without risks, is more favourable than has been the case for some time.

That is indeed reassuring. The governor is also optimistic about the state of the domestic economy, which he believes has strengthened considerably since mid-year. He notes:

The pace of consumer spending has accelerated sharply, business confidence is high, and the labour market has firmed over recent months.

The difficult point has been the appreciation of the exchange rate, but he notes:

... the stronger international climate, rising commodity prices and more favourable conditions in the farm sector indicate improving export prospects. Hence, notwithstanding some early signs of a change in sentiment in the housing market, the overall prospects are for strong growth of the Australian economy.

So we are seeing a continuation and probably a strengthening of sentiment, at least at the bank, that the signals are less ambiguous than they were at the beginning of the year.

The governor obviously now feels that it is time to move on with the process that he began last month of raising rates to bring monetary policy back to more normal and more neutral settings. He notes that the inflation rate is close to the target midpoint of between two and three per cent underlying inflation. Domestic sourced inflationary pressures have risen. The overall inflation rate, however, is being held down by the higher exchange rate. He says that in the short term the exchange rate effects are likely to reduce inflation further, but, as with all Reserve Bank governors, he is a little equitable and says:

... inflation is expected to be on a rising trajectory given the strength of domestic demand, firming labour market conditions and continuing strong price pressures in the non-tradeables sector of the economy.

So he is also moving pre-emptively against further inflationary pressures. I suppose the bad point for home buyers and the farm sector is that he notes:

Monetary policy is continuing to have a stimulatory effect on the economy through domestic credit expansion. The growth of credit remains rapid and indeed has picked up further in the past few months. The prevailing level of the cash rate after the November increase was still below neutral, and interest rates of financial intermediaries remained low by the standards of recent years.

Mr Macfarlane is saying that the settings are still below neutral, which implies that there may be further movement in the not too distant future to get them back to what he describes as more neutral settings. The final sentence of the governor's media release confirms that. It says:

In these circumstances the Board took the view that a further increase in the cash rate was warranted in order to reduce the degree of stimulus to the economy from monetary policy.

It seems evident from all of this that the bank still believes that the stance on monetary policy is expansionary. The outlook, particularly internationally, has strengthened over the course of the last six months and there seems every indication that the interest rate increase that we have seen today will not in fact be the last. We are now at 5.25 per cent. When the governor began talking about the stance of monetary policy being expansionary, he gave general indications that were interpreted to mean that a more neutral position was 5½ per cent. We are certainly not there yet, but there is every hint in this press release that there will be further movement and further tightening of policy in the not too distant future.