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March 19, 2009 – 8:09AM
The Reserve Bank of Australia (RBA) expects the local economy to remain weak in 2009, but is confident policy makers have the necessary tools to support the nation amid the global financial crisis.

RBA assistant governor of economics Malcolm Edey says Australia is being affected by the “very severe” global economic crisis and sharp downturn in global demand and activity.

“In this environment, its not going to be possible for Australia to avoid some further weakness in 2009,” Dr Edey told a Foundation for Aged Care business breakfast in Sydney on Thursday.

Dr Edey said indications were that world economic conditions had remained weak in early 2009.

But Dr Edey said Australia was in a better position than most to weather the storm.

“Australia is fortunate to have come into this period in better shape than most, with sound financial institutions, and with more scope than most for macro-economic policies to respond as needed,” Dr Edey said.

“It’s important to recognise that some very substantial actions are being taken around the world to alleviate financial strains, and to restore growth over time.”

In addition to the large stimulus from both a boost to government spending and monetary policy easing that has taken place around the world in response to the crisis, Dr Edey noted policymakers are also focused on ways to improve how financial markets are regulated.

Dr Edey said there was considerable work underway to reform financial regulatory policies, particularly on ways to “better contain financial risk taking” that remain effective as the financial system evolves.

“Considerable work is being done on this front by the major international bodies, including the Financial Stability Forum and the G-20, and Australia is playing an active part in that,” Dr Edey said.

Dr Edey said the challenge was to ensure any reforms that aimed to contain risk taking did not result in risk being “pushed out to the unregulated part of the system”.

This was the lesson from the current financial crisis, Dr Edey said, where regulations on bank capital resulted in banks in the US and other major economies shifting more and more of their activities into off-balance-sheet vehicles, where risk controls were weak.

“It’s in the nature of markets that they will tend to innovate around regulations, and in any case the nature of risk-taking is going to keep changing as financial systems get more sophisticated,” Dr Edey said.

“All of that highlights the need for regulatory frameworks to be adaptable to changing circumstances.”

Dr Edey noted that central banks around the world had cut their policy interest rates to very low levels.

Governments had provided direct support to financial institutions, through capital injections, asset purchases and the provisions of various guarantees.

The Australian government has used its triple-A credit rating to guarantee the deposits and wholesale funding initiatives of banks.

“More still needs to be done, but one encouraging sign in that banks have been able to make good use of their capacity to issue guaranteed bonds and this is helping to alleviate uncertainty about the availability of longer term funding,” Dr Edey said.

Fiscal stimulus in economies around the world had also been substantial.

“In total, discretionary fiscal measures announced since late last year will provided a stimulus of close to two per cent of world GDP (gross domestic product) in 2009,” he said.

“This is in addition to the effects of the automatic fiscal stabilisers, which are themselves quite substantial.”


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