RBA Governor highlighted Australia's advantages

RBA Governor's speech highlighted Australia's advantages

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Reserve Bank Governor Glenn Stevens today delivered a speech on Recent Financial Developments to the ACI 2010 49th World Congress in Sydney. The Governor’s speech focused principally on developments in financial markets, banking and sovereign debt offshore. Neither the speech, nor the subsequent question and answer session, added anything that was new or unexpected to the debate on Australia’s near term policy outlook.

The Governor did, however, indicate that Australia, where economic and financial circumstances differ from those in most other economies, is not alone in having embarked on the “return to normality”. The speed of adjustment in each jurisdiction, of course, varies with economic conditions. Also, the Governor highlighted that Australia is the “conspicuous exception” in avoiding the high debt ratios seen in many other economies. Stevens also made reference to the role foreign investors may be playing in helping to drive up Aussie house prices, although the extent of their influence is difficult to quantify.

On global developments, the main takeaways from the Governor’s speech are that there have been significant improvements in financial and economic conditions since the “near death experience” of 18 months ago. There are, though, still difficulties to overcome. The Governor highlighted the divergence in performance between the large developed economies and emerging markets, where the shape of the growth rebound best approximates a “v”. According to Mr. Stevens, there will be significant pressure for governments to unwind fiscal accommodation in the years ahead, but policymakers first must ensure the economic recovery is entrenched.

The Governor’s speech today follows the predictably upbeat comments yesterday from Phil Lowe, the RBA’s Assistant Governor (Economic), which once again indicated that the process of policy normalization has some way to run. The RBA’s position remains that, while the growth outlook is bright, core inflation will continue to fall. This apparent paradox implies that the RBA is in no rush to hike the cash rate again. We, therefore, have not altered our view that the next rate hike will be in early May, and that the target rate will be 5% by the end of the year.

ENDS

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