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

The Reserve Bank will be operating in the money market this morning to reduce overnight cash rates by 1 percentage point, to around 8½ per cent. This action follows yesterday's Board meeting and consultations with the Treasurer.

The Board of the Bank concluded that a further reduction in interest rates of this magnitude was warranted, given recent and, prospective developments in inflation and domestic demand.

The recent September quarter CPI confirmed earlier evidence that inflation is still trending down. This trend is supported by other monthly indicators of inflation, and by measures of inflationary expectations based on surveys and financial prices.

Allowing for special factors, the ‘underlying’ rate of inflation is currently of the order of 3½ per cent, about half the comparable rate only two years ago. Maintaining and further improving on that underlying rate will be critical in helping to sustain lower interest rates, and in generating new productive investment and improved competitiveness over the years ahead.

In the meanwhile, while there are some signs of a pick-up in economic activity, notably in housing and retail sales, considerable slack exists in the economy. By helping to restore the cash flow of the business sector in particular, lower borrowing costs will help to underpin the expected modest recovery in output. The Board does not believe that today's reduction in cash rates will trigger any resurgence of inflationary pressures.

The Bank expects banks and other financial institutions to move promptly to reflect today's reduction in cash rates in their lending rates.