Sydney, Sep 17, 2008 AEST (ABN Newswire) - RBA Governor Glenn Stevens today delivered a keenly-anticipated speech to the Institute of Company Directors' luncheon in Sydney. Despite the onset of what the Governor described as a "storm" engulfing global financial markets, the Governor largely stuck to his original plan of speaking about four important long-run issues for Australia's economy. The four themes were: the impact of China, dealing with a fully-employed economy, the significance of the likely end of the boom in household gearing, and the role of financial regulation. Only briefly, at the outset of the Governor's prepared commentary and in a later answer to a question from the floor, did Mr. Stevens refer, in particular, to recent developments in financial markets.
On the events in markets, the bottom line is that Mr. Stevens believes Australia is weathering the storm well. This is mainly because of our flexible economy, the floating AUD, which has dropped 20% in the last two months, thus easing financial conditions, the stable domestic financial system, and prudent financial regulation. Importantly, too, the Governor indicated that Australia is "light years" away from having the same problems that have triggered financial distress in the US. According to the Governor, Australia's housing market dynamics relative to those in the US, for example, are "night and day". Australia, therefore, does not have the same root-cause of financial system distress as does the US.
On monetary policy, Mr. Stevens did not provide guidance on the likely timing of the next rate cut - in fact, he deliberately avoided discussing the merits of the latest pricing in futures markets, which implies there will be at least two 25bp rate cuts by the RBA this year. He also avoided a question on the likely direction of the AUD. Given the lack of additional clarity on the policy outlook, at this stage, while recognizing that things are fluid and that the risk of an earlier move has risen, we are sticking with our view that the RBA will wait until December before easing policy again. Prior to this week, the RBA seemed in no rush to ease policy again - today's speech did not create a different impression.
On the first of Mr. Stevens' four long-run themes, China, the Governor's main points were that China continues to be a powerful, positive influence on Australia's economy. The RBA believes that growth in China has slowed, thanks in part to the actions of the authorities to cool demand. China's still strong demand for commodities, though, means Australia's terms of trade has been soaring, which provides a substantial source of support for national income. The Governor saw no need to revise the RBA's forecast for the terms of trade, despite the building risks to global economic growth from the financial market turmoil. He did, however, reinforce that the terms of trade probably has peaked, albeit after the largest rise for more than 50 years.
On the other long-run themes, the Governor made clear that having to deal with a fully-employed economy is a "good" problem to have. He did, however, reinforce earlier observations that, given there is less spare capacity, Australia's long term rate of economic growth probably has to slow. According to Mr. Stevens, over the long term, sustaining productivity growth is the key. Mr. Stevens spent a considerable amount of time explaining the run up in household debt, but believes there is likely to be a period of de-leveraging by households - he believes we already have entered this phase. Finally, the Governor outlined the merits of authorities "leaning against" asset price booms to try and avert potential problems accumulating, but he did not express a clear view on the best way forward.
"Speech by RBA Governor" by Stephen Walters, published in Economic Research Sydney, 18 Sept 2008, J.P. Morgan Australia.
Contact
Kwai Yung
Investment Adviser
Ord Minnett Ltd
Tel: (+61 2) 8216 6799
Fax: (+61 2) 8216 6311
email: kyung@ords.com.au
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