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RBA Governor’s Statement to House Economics Committee

This is the text of the opening statement to the House of Representatives Standing Committee on Economics by Glenn Stevens, Governor of the Reserve Bank.

When we last met with the Committee in February this year, it was becoming clear that the recovery in the global economy was proceeding faster than many had expected. It was also clear that the strongest performance was in the emerging world, while recoveries in countries that had been at the centre of the financial events of 2007 and 2008 were relatively subdued. Global financial markets had continued to improve, but were paying close attention to the rise in sovereign debt in a number of countries.

At that time, people were talking about an expansion in global GDP of something like 4 per cent in 2010. As it turns out, it looks like the outcome will be stronger than that: current estimates for the year are about 4¾ per cent, which is above trend. The pattern of growth is still rather uneven. The additional strength has been concentrated in the emerging countries, with growth in China and India running at a pace of around 10 per cent in 2010. In contrast, growth of about 2½ per cent for the G7 group, after a contraction of around 3½ per cent in 2009, will leave a considerable margin of spare capacity and particularly of unemployed labour. [Read more…]

What Caused The Financial Crisis?

The global financial crisis is “a crisis of credit markets”, says Malcolm Edey, Assistant Governor (Economic) of the Reserve Bank of Australia.

In an address to the Foundation for Aged Care Business Breakfast in Sydney, Edey traced the origins of the financial crisis, discussed its effects and looked at responses to the crisis.

Text of Reserve Bank Assistant Governor Malcolm Edey’s speech:

I’ve been asked to talk this morning about the current financial crisis: where it came from, and the effects that it’s having on the economy.

What we refer to as the global financial crisis is, at its core, a crisis of credit markets, centred particularly in the United States, the UK and Europe, but with significant spill-over effects to the rest of the world.

Over the last year or so, financial institutions in the major economies have reported losses on a large scale. Some of these institutions have become insolvent, or have had to be taken over or rescued by their governments. Associated with all of that has been a massive swing in the appetite of world financial markets for risk, and in their capacity to accept risk. The result has been a shift from easily available credit to tight credit. [Read more…]

Reserve Bank Cuts Interest Rates Another 0.75%

The Reserve Bank of Australia has cut the cash rate a further 0.75% to 5.25%.

The 0.75% cut follows reductions of 1.0% in October and 0.25% in September.

  • Listen to Treasurer Wayne Swan (10m)

Text of statement from the Governor of the Reserve Bank, Glenn Stevens.

At its meeting today, the Board decided to reduce the cash rate by 75 basis points to 5.25 per cent, effective 5 November 2008. [Read more…]

Global Economic Catastrophe Now Less Likely Says Reserve Bank Governor

Glenn Stevens, Governor of the Reserve Bank of AustraliaThe Governor of the Reserve Bank of Australia, Glenn Stevens, says the risk of a “global economic catastrophe” has declined.

In an address to the Trans-Tasman Business Circle today, Stevens said: “At moments like this, it is hazardous to make predictions. However, it seems to me that the key elements of dealing with the root issues in the crisis are starting to come into place. Policy-makers in the major countries do ‘get it’. The plans are not precisely uniform across countries – that is never achievable anyway – but we can, I think, see the shape of a broad common outline. It addresses the issues of liquidity, capital and confidence. There is much more work to be done yet on the design details, and one area in which further international co-operation would be helpful is in the area of making these various guarantee arrangements broadly consistent. But the world is, it seems to me, getting on to a better path. As a result, the likelihood of a global catastrophe has in fact declined over the past couple of weeks.” [Read more…]

Reserve Bank Cuts Interest Rates By One Percent

The Reserve Bank of Australia has confounded economic pundits by announcing a cut of one full percentage point in interest rates.

The cash rate has been cut from 7% to 6%. The common prediction in recent days had been for a 0.5% cut.

[Read more…]

Rudd Government Strengthens Independence Of The Reserve Bank

Following its first Cabinet meeting in Brisbane, the Rudd Labor Government has announced measures aimed at strengthening the independence of the Reserve Bank of Australia.

The measures include raising the positions of Governor and Deputy Governor to the same level of statutory independence as the Commissioner of Taxation. Future appointments of the Governor and Deputy Governor will continue to be made by the government of the day but terminations will require parliamentary approval. [Read more…]

Reserve Bank Holds Interest Rates But Still Concerned About Inflation

The Reserve Bank of Australia has held interest rates at current levels but expressed concern about inflation tendencies in the economy.

Following the Reserve’s board meeting yesterday, the cash rate remains unchanged at 6.75%.

The Governor of the Reserve Bank, Glenn Stevens, said: “The Board remains concerned about the outlook for inflation.”

This is the text of the statement from the Reserve Bank:



At its meeting yesterday, the Board decided to leave the cash rate unchanged at 6.75 per cent. As part of wider changes to communication practices which the Board has adopted (see separate announcement on communication), it was further decided that a statement explaining the decision would be released.

Recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity. Inflation on a year ended basis, as measured by the CPI and underlying measures, is likely to be above 3 per cent in the first half of 2008, and to decline somewhat thereafter.

Sentiment in global credit markets has deteriorated recently after an earlier improvement and prospects for growth in the major economies appear to be weakening. It is unclear to what extent that will affect Asia, where conditions at this point look quite strong. But overall, it now appears likely that global growth will be closer to trend in 2008, after several years of above trend growth. High prices for food, energy and natural resources, however, continue to pose a significant risk to inflation around the world.

In Australia, the pressures arising from the global financial turmoil have been less pronounced than elsewhere, and the flow of credit to sound borrowers does not appear to have been impaired. Nonetheless borrowing costs have risen appreciably since mid year, particularly for business borrowers, as a result both of changes in monetary policy and market-driven increases in funding costs for intermediaries. Depending on conditions in wholesale markets in the near term, some further rise in rates charged to borrowers may yet occur. These developments will help to contain private demand over the period ahead.

The Board remains concerned about the outlook for inflation. But given the heightened uncertainty about the international outlook and the local trends in wholesale borrowing costs, both of which could have a bearing on inflation over the medium term, it judged that the current stance of monetary policy should be maintained for the time being.

Reserve Bank Lifts Interest Rates By 0.25%

The Reserve Bank has announced a 25 basis points increase in the cash rate to 6.75%.

The interest rate increase is the first to ever take place during an election campaign.

It is the sixth increase in interest rates since the 2004 election.

This is the text of the statement on monetary policy by the Governor of the Reserve Bank, Glenn Stevens.

Glenn Stevens, Governor of the Reserve Bank of Australia At its meeting yesterday, the Board decided to increase the cash rate by 25 basis points to 6.75 per cent.

Inflation in Australia has increased. Underlying inflation was 0.9 per cent in the September quarter and close to 3 per cent over the past year. The annual pace of CPI inflation was lower, but this reflected two very low quarterly results nearly a year ago, as well as recent changes to the treatment of child care costs. By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent.

During 2007, the pace of growth of demand and output has also increased. There are few signs of that strength diminishing as yet, and reports of high capacity usage and shortages of suitable labour persist. Growth in labour costs has been contained so far, and high levels of investment are adding to productive capacity in some sectors. The rise in the exchange rate will help to contain pressure on prices. But growth in aggregate demand will, nonetheless, need to moderate if inflation is to be kept to 2-3 per cent in the medium term.

In reaching its decision, the Board continued to look carefully at developments in international financial markets. Conditions have improved over the past couple of months, but confidence remains fragile. Funding costs for intermediaries remain elevated relative to official interest rates, and capital market conditions are still difficult, in several major countries. This is likely to result in some moderation in growth in those countries in 2008, and forecasts for global growth have been revised down accordingly. The world economy is still expected to grow at an above-average pace, however, led by strong growth in China and other parts of Asia. High global commodity prices remain an important source of stimulus to Australian spending and activity.

In Australia, the tightening in credit conditions resulting from the global turmoil has been less pronounced than elsewhere. Wholesale funding costs have risen a little compared with official rates, and some borrowers have experienced an increase in interest costs as a result, but the flow of credit to sound borrowers does not appear to have been impaired.

Having weighed both the international and domestic information available, the Board judged that a further increase in the cash rate was needed now in order to contain inflation in the medium term.

Australian Dollar Falls To All-Time Low

The Australian dollar has fallen to an all-time low of 54.93 cents as measured against the American dollar.

This is the lowest point since the floating of the dollar commenced in 1983.

The currency rallied slightly to settle around 55.20 cents early this afternoon.

The currency crisis is now getting serious and will have important political consequences. Despite all the measures taken over the past 15-20 years to globalise the Australian economy, the exchange rate has steadily declined. In 1983, it was in excess of 90 cents. [Read more…]