Not a Media Release From the RBA: 5 June 2012

 

Not a Media Release

Number	2012-XX
Date	5 June 2012
Embargo	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 3.50 per cent, effective 6 June 2012. This decision is based on information received over the past month that suggest the risks to the global economic growth outlook have moved lower, along with the inflation outlook.

Growth in the world economy has remained subdued in the early part of 2012, and is likely to continue at a below-trend pace for the remainder of the year. While a deep economic downturn is not occurring at this stage, recent developments suggest that the tentative positive outlook for the global economy earlier in 2012 are reversing.

Growth in China has moderated and is likely to remain at a more measured and pace in the future. Conditions in other parts of Asia softened further in early 2012 and policy settings have generally been eased. Among the major countries, conditions in Europe remain very difficult with weak economic conditions are sharply rising unemployment.  Recent indicators suggest that growth in the United States remains subdued with growth at this stage remaining below trend. Commodity prices have weakened appreciably in the last month which indicates a slowing in global demand. Australia’s terms of trade similarly peaked about six months ago and are poised to fall further through 2012.

Financial market sentiment has deteriorated in the past month which has renewed pressure on wholesale funding costs for banks.  Market sentiment remains skittish and the tasks of putting European banks and sovereigns onto a sound footing for the longer term, and of improving Europe’s growth prospects, remain large. Hence Europe will remain a potential source of adverse shocks for some time yet which will weigh on global economic and market conditions.

In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years.  Output growth was affected in part by temporary factors, but also what had until recently been the persistently high exchange rate.

Considerable structural change is also occurring in the economy. Labour market conditions appear mixed, with the recent data showing a more positive trend for employment and the rate of unemployment remains little changed at a low level.  Fiscal settings are expected to subtract for economic growth over the next year.

Inflation remains low and over the coming year, it is expected to remain around the bottom of the 2-3 per cent target range, abstracting from the effects of the carbon price.  If global conditions and commodity prices weaken further, inflation could move lower.

As a result of the reduction in the cash rate in May, interest rates for borrowers are a little below their medium-term averages which in time, will support borrowing and demand.

Credit growth remains modest overall. Housing prices are weakening as are the prices of stocks which is dampening consumer wealth.  Other indicators for housing are weak. The exchange rate has in the past month moved lower, particularly against a stronger United States dollar, partly matching the decline in commodity prices, the terms of trade and the global economy more generally.

The outlook for inflation is such that the Board has scope to further adjust monetary policy settings if recent downside risks to the economy intensify or come to fruition.  The Board will continue to closely monitor economic trends and will set interest rates at a level that is supportive of growth and employment and at the same time, maintain the inflation target over the medium term.