RBA delivers upbeat economic summary

The Reserve Bank Governor, Mr Ian McFarlane, yesterday indicated that official interest rates were on hold, despite a forecasted rise in inflation to 2% by the end of 1999 and a decrease in the unemployment rate from 7.5% to 7%. Economic growth is expected to slow from 4.8% to around 3% next year.

Wages, profit and employment had proved accurate measures of future expenditure that suggested stronger business investment. Mr McFarlane indicated that the lack of strong employment growth had surprised somewhat but overall was expected to meet Treasury estimates of 7.5% by the middle of 2000.

The RBA Governor also noted that the Government’s new tax package was unlikely to have any implications on monetary policy, but a one-off stimulatory impact on the economy was expected. He pointed out that “based on current forecasts the economy could comfortably accommodate the expansion” and that price stability was the best way to encourage employment growth. Mr McFarlane stressed the importance of low inflation in ensuring the boom period continued.

He again reiterated that unlike the USA, Australia’s current economic outlook based on its economic fundamentals did not warrant a tightening of monetary policy. “If the US tightens its interest rates, Australia doesn’t have to”, he said.

On consumption growth, the RBA noted that it would fall from recent high levels. “I would be very, very surprised if house-holds continue to spend faster than the rise in incomes,” said Mr McFarlane. Commenting on low household savings, he said the main concern was if lower savings meant individuals had not provided adequately for retirement.