RBA Governor addresses Toowoomba business community

Reserve Bank of Australia Governor Mr Glenn Stevens has presented a positive report on the Australian economy and indicated that the string of interest rate rises might be coming to an end.

Mr Stevens was keynote speaker at the first Regional Business Leaders’ Economic Conditions Forum in Toowoomba, a joint venture between USQ and the Toowoomba Chamber of Commerce today (Friday, April 23).

Mr Stevens informed the 400 local business people and media representatives that Australia's economy had surprised the Reserve Bank with its resilience and recovery through what he described as 'the Great Recession'.

'The latter part of 2008 and the first few months of 2009 saw what has come to be regarded as the most serious international recession in decades,' he said. 'While several major countries have had one of their most serious recessions in the post-War period, Australia had arguably one of its mildest.'

He said the unemployment rate is 2 percentage points lower than the RBA had forecast a year ago, and that GDP is 4 per cent higher than the bank expected.

'One would not expect the setting of interest rates to be unusually low,' Mr Stevens said.

'If the economy is growing close to trend, and inflation is close to target, one would expect interest rates to be pretty close to average.

'The Reserve Bank has moved early to raise the cash rate to levels that deliver interest rates for borrowers and depositors more like those that have been the average experience over the past 10 to 12 years. Those interest rates are now pretty close to that average.'

Mr Stevens re-emphasised the role the re-emerging commodities boom is playing in boosting Australia's national income.

'Demand for natural resources has returned and prices for those products are rising... Australia's terms of trade will, it now appears, probably return during 2010 to something pretty close to the 50-year peak seen in 2008.'

'As usual with these things, we cannot know to what extent this change is permanent, as opposed to being a temporary cyclical event.'

He said that he has the bank closely watching the effect on inflation, which it originally feared might fall below its 2-3 per cent target, but which it now worries may start accelerating again.

The Reserve Bank governor asked for understanding from home owners with mortgages, and explained that interest rates had fallen to counter an emergency which, in Australia at least, did not eventuate.

'Eighteen months ago, the board moved quickly to establish a much lower level of interest rates in the face of a serious threat to economic activity,' he said.

'But interest rates couldn't stay at those 'emergency' lows if the threat did not materialise... Hence the cash rate has risen by 125 basis points over seven months - which is still only about a third the pace of the earlier declines.'