Since early February, the Reserve Bank has reduced the overnight cash rate by 125 basis points to 5 per cent. A number of people have pointed out that this is an uncharacteristically large reduction over such a relatively short period of time. Why have we seen the need for such a change? My response revolves around two points.
First, even though the outlook for the economy remains positive, the risks on the downside have increased this year. Second, the continuing good inflation performance of the economy provides scope for the Bank to be pro-active in trying to minimise these risks. Let me begin with the risks. The principal circumstance that has changed in recent months has been international, not domestic.