Not a Statement by Glenn Stevens, Governor RBA

The following is a cheeky attempt to anticipate the RBA announcement at 2.30pm tomorrow, Sydney time. The views and comments are mine.

Not A Media Release

Number		2011-2XYZ
Date	6 December 2011
Embargo	For Immediate Release

Not a Statement by Glenn Stevens, Governor, RBA: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 4.25 per cent, effective 7 December 2011.

Recent information is consistent with a moderation in the pace of global growth, though fears of a major downturn have not been borne out so far. The pace of the US economic expansion continues to be moderate and there remains considerable spare capacity. China's growth has continued to slow leading to some cautionary easing in policy. Output in Asia remains solid, and domestic demand in the region is generally expanding. Trade performance, however, continues to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue. Commodity prices have stabilized at relatively high levels after some falls from around mid-year.

Financial markets have recovered somewhat from the turmoil of recent months, helped by the coordinated central bank policy action to support banking and market liquidity. Further signs that European governments are making progress in their efforts to deal with the sovereign debt and banking problems has reduced market pessimism. Equity markets have gained ground, but it is still likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a longer period of precautionary behaviour by firms and households.

Information about the Australian economy suggests moderate growth overall. The terms of trade have now probably peaked and will decline somewhat in the near term, but they remain very high. Investment in the resources sector is picking up very strongly, with much more to come. Some related service sectors are enjoying better-than-average conditions. In other sectors, cautious behaviour by households and the high exchange rate have had a noticeable dampening effect. Dwelling construction has weakened further in recent months while consumer demand appears to be expanding at a little below the long run trend. The unemployment rate has increased a little over recent months to be around 5¼ per cent. Fiscal policy is having a contractionary effect on economic activity and public demand is forecast to subtract from GDP growth in 2012-13.

Recent information on underlying inflation suggests the subdued demand conditions and the high exchange rate continue to dampen inflation. With labour market conditions now softer than at the beginning od 2011, there has been confirmation that growth in labour costs has slowed. The Labour Price Index rose by around 3½ per cent and is consistent with moderate inflation.

The Bank's current judgement is that inflation is likely to be consistent with the 2–3 per cent target in 2012 and 2013, abstracting from the impact of the carbon pricing scheme. The risks to this outlook are evenly balanced although in the near term, headline inflation is likely to be very low as some temporary price spikes unwind.

Credit growth remains subdued and there continue to be orderly falls in house prices. The exchange rate has been very variable over the past few months, but remains at historically high levels. Financial conditions eased in response to the 25 basis point interest rate cut in November with standard variable mortgage and most business lending interest rates falling. Bank deposit rates have also fallen in recent months.

Last month, the Board moved monetary policy from a mildly restrictive stance given the overall growth moderation, lower inflation and subdued confidence outside the resources sector. These trends remain in place and the Board concluded that a neutral stance of monetary policy is required to be consistent with achieving sustainable growth and 2–3 per cent inflation over time.