Not a Media Release
7 February 2012
For Immediate Release
Not a Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 4.00 per cent, effective 8 February 2012.
Growth in the global economy moderated in 2011 and the early indicators for 2012 remain subdued but on balance, much as anticipated. The United States is showing encouraging signs of growth and much of Asia is growing at a solid pace. China's growth has been slowing and it appears to be stabilizing at a more moderate pace, much as policy makers intended. Economic activity in Europe is consistent with a recession and this weakness will act to dampen global growth and confidence in 2012.
The sovereign credit and banking problems in Europe, to which European governments are still seeking to craft a full response, continue to weigh on economic activity over the period ahead. After a period of severe disruption in the latter part of 2011, financial markets have recently experienced more stable conditions although considerable uncertainty remains. This, together with precautionary behaviour by firms and households, means that the likelihood of ongoing subdued global growth is likely. Commodity prices have reflected this, declining further over recent months and taking pressure off CPI inflation rates. This has increased the scope for some easing in monetary policy in a number of countries.
Information about the Australian economy suggests output growth has been a little below trend, although demand growth has been a little stronger than that. The terms of trade are starting to fall, but this is from extraordinarily high levels. Investment in the resources sector remains very strong, with much more to come. Some related service sectors are enjoying better-than-average conditions. In other sectors, changed behaviour by households and the high exchange rate continue to have had a noticeable dampening effect.
The unemployment rate has increased a little since the middle of 2011, with more recent evidence emerging of a decline in employment and the workforce participation rate. These indicators suggest growing spare capacity in the labour market.
CPI inflation on a year-ended basis has fallen to now been at the top of the target at the latest reading. Next quarter, the year-ended CPI inflation rate is forecast to fall sharply. Underlying inflation remains in the middle of the target range, where it has been since the end of 2010, although there was a clear moderation in the second half of 2011. Moreover, with labour market conditions softening further, labour costs outside the resources and related sectors are likely to remain subdued. Accordingly, 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 reduction in the cash rate as a result of the Board's previous decision flowed through to lending rates, which are now around their average level of the past 15 years. Term funding conditions for financial institutions remain more difficult although in recent weeks, there has been some easing in the wholesale funding market. Credit growth remains subdued and asset prices remain soft. The exchange rate has risen since the Board’s meeting in December to be at multi-decades highs.
Overall, the Board concluded, on the basis of all the available information, that the inflation outlook afforded scope for a modest reduction in the cash rate. The Board will continue to set policy as needed to foster sustainable growth and low inflation over time.