We do think, however, that demand growth in Australia is now in the process of moderating. The demand for credit by households has also been weakening over recent months. Measures of confidence have declined. While those measures can provide false signals, our assessment is that a change in trend is occurring, and we are hearing that from businesses we talk to. A tightening in financial conditions, lower share prices and heightened concerns over the global financial problems will all have played a part in this change.

The likely extent and persistence of this slowing in demand is quite uncertain, as these things usually are. There remain powerful conflicting forces at work, so we can expect that difficult issues for judgment will remain with us for some time.

These are issues with which the RBA Board has to grapple. At its meeting this week, the Board reached the view that, for the time being, policy settings should remain unchanged. The current rate of inflation is clearly uncomfortably high, and were expectations of high ongoing inflation to take root, it would be even more difficult to reduce inflation again. Hence, policymakers are obliged to have in place a policy setting that represents a credible response to evident inflation pressures. But the significant tightening in financial conditions that has occurred since mid 2007 is a strong response. Short‑term interest rates are towards the top end of the range experienced during the low‑inflation period. The Board is also conscious that some non‑price tightening of credit conditions is probably occurring at the margin. These factors should be working to slow demand. There is at least some evidence that a moderation in demand is occurring. That, if it continues, should in due course act to slow prices.

We will be receiving a round of prices data in a few weeks’ time, which will afford another chance to review both recent performance and the outlook. As I noted earlier, the headline CPI rate is likely to be high. We will naturally examine the outcome for new insights about the extent of inflation currently occurring. But as well as that, it will be important to make continuing assessments of the extent both of the likely moderation in demand and its effect on inflation over time. This will by no means be an easy balance to strike. But if, by restraining demand for a while, we can secure a gradual reduction in inflation over the period ahead, then an important foundation of Australia’s good macroeconomic performance over the past decade and a half will remain in place. That, in turn, will offer the prospect of good sustainable growth into the next decade. That is the goal of monetary policy.


Available at:

http://www.rba.gov.au/Speeches/2008/sp_gov_040408.html