What The Reserve Bank Says ...
The Age
Wednesday March 5, 2008
At its meeting today, the board decided to increase the cash rate by 25 basis points to 7.25%, effective March 5, 2008. This adjustment was made in order to contain and reduce inflation over the medium term.
Inflation was high in 2007, with an annual CPI increase of 3% in the December quarter and underlying measures around 3%. Domestic demand grew at rates appreciably higher than the growth of the economy's productive capacity over the year. *1 Labour market conditions remained strong into early 2008, and reports of high capacity usage and shortages of suitable labour persist. Inflation is likely to remain relatively high in the short term, and will probably rise further in year-ended terms, before moderating next year in response to slower growth in demand.The board took account of events abroad and developments in financial markets. The world economy is slowing and it appears likely that global growth will be below trend in 2008. Recent trends in world commodity markets, however, have further strengthened prospects for Australia's terms of trade. *2 Sentiment in global financial markets remains fragile. Australian financial intermediaries are experiencing increases in funding costs, which are being passed on to customers. Some tightening in credit standards for more risky borrowers is occurring.There is tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat. The extent of that moderation is uncertain, however. *3 As the board noted last month, a significant slowing in demand from its pace of last year is likely to be necessary to reduce inflation over time.Having weighed both the international and domestic information available, the board concluded that a further tightening in monetary policy was needed to secure an inflation rate of 2-3% over time. As a result of this and earlier actions, and rises in borrowing costs, which are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 is substantial.The board will continue to evaluate prospects for economic activity and inflation in the light of new information. *4 ... AND WHAT IT MEANS BY TIM COLEBATCH 1 This is the core of the problem: our spending (domestic demand) is growing faster than our capacity to produce the things we buy and sell. Some of that excess demand spills over into imports, but some just drives up prices.Remember: inflation is defined as too much money chasing too few goods (and services).2 Soaring prices for iron ore, coal, wheat and other commodities are expected to lift our national income by more than 2% this year, on top of all the other things driving it up. That's a big buffer against the problems on global financial markets.3 The Reserve acknowledges that consumer spending is slowing, as it intends, but doubts that it is slowing enough. Its latest monetary policy statement implied that it aims to drive growth in spending down sharply, to 2-2.5% a year, and drive unemployment up, to reduce inflationary expectations.4 The closing sentences are a significant shift from the hardline tone of the bank's quarterly statement three weeks ago. That statement was seen as implying at least two more rates rises ahead. This one acknowledges that with this rate rise - possibly to be inflated by another hike in the commercial banks' margins - borrowers will now be paying substantially more than in mid-2007, implying that this rise might well be enough to do the job. Its final sentence is carefully balanced to imply neutrality as to whether the next rate move will be up or down.
© 2008 The Age
