Aug 172007

RBA Governor Glenn Stevens said he had no reservations about tightening monetary policy following its August Board meeting, despite the recent escalation in financial market volatility. Indeed, the key phrase from the opening statement in our view was this:

“Objectively, it is extremely unlikely that the sub­prime mortgage exposures could significantly damage the core banking system in any significant country. The exposures are spread far too widely for that to occur. But precisely because they are spread widely, and because the associated financial structures are opaque, information on who is exposed and by how much is incomplete. Hence people remain wary.”

This suggests that the RBA is viewing the current volatility as a crisis of confidence amongst financial market participants rather than a crisis of solvency. The RBA does acknowledge that if this persists it could still have a material impact on the economy, and they argue that increased transparency about which firms are holding what exposure would be very helpful. However, the overall tone is that there is certainly no panic in the RBA and no regret about their actions so far. The RBA still expects strong growth (both domestically and globally) and for Australian inflation to remain near 3% for the next year. Until this view is proven incorrect, the RBA will continue to entertain the notion of a further interest rate hike at some stage.
courtesy of Economic Research Division – Macquarie Bank Limited