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

The Reserve Bank will be operating in the domestic money market this morning to reduce cash rates by about half a percentage point to around 11½ per cent. This action follows last week's Board meeting and discussions with the Treasurer. It will bring the total reduction in cash rates since January 1990 to 6½ percentage points; the previous reduction (of 1 percentage point) occurred on 18 December 1990.

The Bank believes that this further modest reduction is warranted by current trends in the economy and on-going signs of reductions in inflation and in inflationary expectations.

Over the past year, there has been a substantial fall in domestic demand, although that trend now appears to be flattening out. Today's reduction in cash rates will permit banks and other financial institutions to lower their interest rates. Together with the earlier interest rate reductions, this should contribute to a gradual pick-up in domestic demand during the course of 1991, consistent with further reductions in inflation.

Inflation indicators, including the price and earnings measures from the December quarter national accounts, monthly price indices, and long term bond yields, suggest that the trend towards lower inflation is continuing. A lower inflation rate will help in managing many of Australia's medium term problems, including international competitiveness and the current account deficit, and the authorities will ensure that monetary policy continues to pursue that objective.