Reserve Bank of Australia Annual Report – 1981 Introduction

Activity rose strongly in the Australian economy during 1980/81. This contrasted with generally depressed economic conditions overseas. Following healthy increases in 1979/80, real non-farm product and total employment recorded their highest rates of growth for more than half a decade. The recovery was broadly based, with strong contributions from spending on both capital formation and consumption.

A downward trend in the rate of growth of consumer prices, evident in the second half of 1980, levelled off in the first half of 1981. Average weekly earnings rose at their highest rate for five years; real wages increased, probably by more than the gain in the average productivity of labour. The rate of unemployment fell, most noticeably late in the year, but remained high. The output and incomes of farmers fell substantially as a result of drought and low commodity prices.

Monetary policy was aimed at reducing the rate of expansion in money and credit but, for the third consecutive year, achievement fell short of the objective. Several factors had a part in this. In response to strong demands for finance, particularly those related to the upsurge in investment, capital inflow was very high throughout 1980/81; the size of the inflow had not fully been expected at the start of the year. Exceptionally volatile conditions in major international markets for finance and foreign exchange influenced the cost and flow of funds, and increased the degree of uncertainty associated with policy decisions. Allowance being made for these factors, it is also clear that policy settings were not kept appropriate for the task at hand.

The overall outcome was one of too rapid growth in money and credit. A widely used measure of money, M3, increased by 12.7 per cent, its highest rate of growth since 1975/76. A broader measure, M3 plus borrowings from the public by non-bank financial institutions, increased by nearly 16 per cent. When viewed in the context of strong monetary expansion in preceding years, monetary policy is seen as having been more accommodating to increases in wages and prices than was desirable.

The Australian economy appears to be entering a period in which moderate growth, or better, may be sustainable for a number of years; shortages of some inputs suggest that such an outcome will require greater flexibility within the Australian economic system. It will also require good economic management. Achievement may fall well short of potential if there is a rekindling of inflation. There is clear pressure towards this in recent trends in labour costs.

Policy can best contribute to growth in activity by exerting downward pressure on inflation. With this in mind, the need to reduce the rate of growth in money and credit remains of central importance. Recent experience suggests that this will require greater willingness to adjust officially controlled interest rates quickly in response to changes in market conditions.

The next chapter provides an account of monetary and external policies during the year, and some comments on the implementation of policies. The following chapter reviews developments in domestic and international markets during the year and sketches the background against which decisions were made. Since many of these developments are now discussed in six-monthly reviews of financial and economic conditions in the Bank's Bulletin, this section is briefer than in past years. Remaining chapters relate to the Bank's accounts and its other functions.