Statement by Philip Lowe Governor Monetary Policy Decision A

Statement by Philip Lowe, Governor:
Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

There has been a broad-based pick-up in the global economy since last year. Labour markets have tightened further in many countries and forecasts for global growth have been revised up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income. Australia’s terms of trade have increased, although some reversal of this is occurring.

Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Core inflation remains low. Long-term bond yields are higher than last year, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.

The Bank’s forecasts for the Australian economy are little changed. Growth is expected to increase gradually over the next couple of years to a little above 3 per cent. The economy is continuing its transition following the end of the mining investment boom, with the drag from the decline in mining investment coming to an end and exports of resources picking up. Growth in consumption is expected to remain moderate and broadly in line with incomes. Non-mining investment remains low as a share of GDP and a stronger pick-up would be welcome.

Indicators of the labour market remain mixed. The unemployment rate has moved a little higher over recent months, but employment growth has been a little stronger. The various forward-looking indicators still point to continued growth in employment over the period ahead. The unemployment rate is expected to decline gradually over time. Wage growth remains slow and this is likely to remain the case for a while yet.

The outlook continues to be supported by the low level of interest rates. Lenders have announced increases in mortgage rates, particularly those paid by investors and on interest-only loans. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Inflation picked up to above 2 per cent in the March quarter in line with the Bank’s expectations. In underlying terms, inflation is running at around 1¾ per cent, a little higher than last year. A gradual further increase in underlying inflation is expected as the economy strengthens.

Conditions in the housing market continue to vary considerably around the country. Prices have been rising briskly in some markets and declining in others. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases are the slowest for two decades. Growth in housing debt has outpaced the slow growth in household incomes. The recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness.

Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

1.4)

According to the media release by Phillip Lowe, the FR is expected to implement contractionary monetary policy by raising interest rates. Contractionary monetary policy reduces aggregate income because it:

a.) Decreases planned saving by households

b.)  Decreases the exchange rate and hence decreases net exports

c.) Decreases interest rates and hence aggregate demand

d.) Decreases planned investment by firms

1.5)

According to the media release by Phillip Lowe, \"The unemployment rate is expected to decline gradually over time.\" Suppose that Australia has an adult population of 50 million and a participation rate of 60%. The ABS uses the rule that anyone doing 1 hour\'s paid work or more is counted as employed. On this basis, suppose that it finds Australia has 27 million employed people.

What is Australia\'s official unemployment rate? Round your answer to a whole number. (as a percentage)

1.6)

Refer to Q1.5. Suppose that the ABS now changes the rule for being employed to 10 hours paid work or more, and finds that Australia now has 24 million employed people. What is the new official unemployment rate? Assume that the labour force participation rate and adult population is unchanged.

Round your answer to a whole number.

1.7)

According to the media release by Phillip Lowe, \"a gradual further increase in underlying inflation is expected as the economy strength.\" All else constant, inflation arises when:

a.)  The expenditure plans of agents exceed the supply of output by firms

b.) The currency appreciates in the foreign exchange market

c.) The government increases unemployment benefits

d.) The earning plans of agents fall short of what they earn in the economy

1.8) The Australian government is concerned about inter-generational equity problems. Key problems arise from a larger number of older retired people being supported by a smaller workforce of young people, and from ever increasing budget deficits to be paid for by younger people.

Encouraging older people to stay in the labour force rather than retire would help fix this problem.

a.) True

b.) False

1.9) The difference between demand pull and cost push inflation is that the former is caused by costs rising without an increase in real output.

a.) True

b.) false

1.10) Inflation targeting aimed at a low and stable inflation rate is desirable because it:

a.) Reduces uncertainty and helps agents plan for the future

b.) Makes Australian exports more competitive overseas

c.) Results in stable interest rates

d.) Helps reduce problems caused by an ageing population

Solution

Answer 14: Decreases planned investment by firms

Answer 15: 10%

Answer 16: 20%

Answer 17: The government increases unemployment benefits

Answer 18: True

Answer 19: False

Answer 20: Makes Australian exports more competitive overseas