Media Release Statement by the Governor, Mr Bernie Fraser: Further Tightening of Monetary Policy

The Reserve Bank will be operating in money markets this morning to increase cash rates by 1 percentage point, to 6½ per cent. This action follows deliberations by the Reserve Bank Board at its October meeting, and consultations with the Treasurer.

Like the increase of three-quarters of a percentage point announced on 17 August, this increase will help to avoid overheating of the economy down the track, thereby prolonging the period of sustained growth in production and employment.

It is clear that, notwithstanding the serious impact which the drought is having on many rural communities, the economy overall is growing robustly. Spending in particular is increasing faster than earlier forecasts might have indicated. Retail sales are up solidly on the back of rising employment and on-going consumer confidence. Business investment also is now growing strongly, and business demand for funds is picking up. Housing loan commitments have slowed but remain at a high level, and the stock of housing credit outstanding is still increasing rapidly.

Price movements to date remain well contained, with inflation continuing at around 2 per cent in underlying terms. Policy settings, however, must be forward looking, and with the earlier slack in the economy now being wound back and employment growing very strongly, pressures on prices and wages can be expected to intensify. Today's forward looking adjustment in monetary policy will help to control those pressures, and help to keep underlying inflation around 2 to 3 per cent.