Thank you to Reuters and LSEG for the opportunity to speak today.
The Monetary Policy Board sets the level of the cash rate that it judges will achieve low and stable inflation and full employment.
The cash rate affects economic activity, employment and inflation through its influence on financial conditions. Financial conditions is a broad concept capturing the ways in which various financial indicators – such as the exchange rate, asset prices, and the cost of and terms on which households and businesses can access finance – affect economic activity and inflation. These financial indicators are all influenced by the cash rate to different degrees. But financial conditions are also influenced by other factors. For example, credit spreads and the availability of funding will depend on the degree of uncertainty and the willingness of market participants and banks to take on risk.
Monetary policy is considered ‘restrictive’ if financial conditions are restraining aggregate demand and ‘accommodative’ if they are stimulating demand.
At its meeting earlier this week, the Board judged that monetary policy is somewhat restrictive. That’s important since, among other things, it underpins the forecasts for slow growth of aggregate demand, which is needed to reduce capacity pressures and bring inflation back to target.