■ ■ ■The Reserve Bank will be acting in the money markets this morning to reduce overnight interest rates by three quarters of a percentage point, to around 5¾ per cent. This action follows yesterday’s Board meeting and consultations with the Treasurer.
Today’s decision continues the process, which commenced in January 1990, of easing nominal interest rates in line with evidence of lower inflation and slackness in the economy.
Recent indicators suggest that inflation will continue at low rates. This is likely notwithstanding some rises in public sector charges and taxes, and the effects of the depreciation of the $A over the past year. Expectations of inflation also have come down and have been reflected in a further significant fall in long-term security yields.
At the same time the recovery in economic activity has not so far developed the momentum expected of it. Demand for labour, in particular, has weakened recently and unemployment remains stubbornly high. Although the full stimulus of the Government’s February economic package will be felt over the year ahead, there seems little risk of the economy overheating.
In these circumstances, the Bank believes that a further reduction in interest rates is appropriate. The size of the reduction is judged to be consistent with contributing to a sustained recovery in activity and employment, while maintaining domestic and overseas investor confidence in the anti-inflationary thrust of policy.
To be effective, the latest reduction in official rates must be translated fully and promptly into lower rates charged to business, home buyers and other borrowers; the Reserve Bank will be looking to banks and other financial institutions to respond in those terms.
Source: Reserved Bank of Australia