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Monday, 16 November 2009
Page: 11765

Mr CRAIG THOMSON (9:00 PM) —On behalf of the Standing Committee on Economics I present the report of the committee entitled Review of the Reserve Bank of Australia Annual Report 2008 (Second Report) together with the minutes of the proceedings.

Ordered that the report be made a parliamentary paper.

Mr CRAIG THOMSON —In September 2008, as the impact of the Lehman Brothers collapse became clear, countries around the world the world tried to protect their economies from the downturn. The Governor of the Reserve Bank noted that by February 2009 the resulting contraction in economic activity in the December quarter was severe in many countries and that global growth had suffered its biggest setback in decades. Just 12 months later, the Australian economy proved its resilience by avoiding a recession.

At the August 2009 hearing the governor was optimistic about the Australian economy and noted that Australia had several advantages including a sound financial system, an absence of the worst of the problems afflicting some countries, exposure to an emerging China and scope to use macroeconomic policies to cushion the downturn. In addition, the Reserve Bank acted decisively through its monetary policy decisions. In September 2008 the policy cash rate was at a contracted level of 7.25 per cent. With the collapse of Lehman Brothers it became self-evident that rates would need to be cut. Where the Reserve Bank showed leadership was through the size and speed of the cash rate reductions that occurred and they occurred with equal significance and decisiveness in terms of fiscal policy acting in concert with monetary policy.

Between September 2008 and April 2009 the Reserve Bank reduced the policy cash rate by 425 basis points. Three rate reductions were in the order of 100 basis points each. It was also notable that the Reserve Bank held off when the policy cash rate reached three per cent. Financial markets were at one point factoring a cash rate of less than two per cent. The contribution the bank’s monetary policy made to underpinning the economy during the height of the downturn cannot be underestimated and will certainly be a benchmark response for future governors of the Reserve Bank to note.

While the Reserve Bank’s approach to monetary policy during the height of the financial crisis showed sound leadership, the period ahead is no less challenging. It is now apparent that the bank has turned to its core objective of inflation targeting. In October 2009 the Reserve Bank was possibly the first among central banks to increase rates. The governor has made it clear that the emergency rates during the crisis would be inappropriate as the economy started to grow. The bank’s objective is now to lift rates to a normal or neutral setting that will provide for long-term growth and core inflation in the target band.

The management of monetary policy, however, during the next six to 12 months will be associated with some risks. The first challenge for the board is the timing and the size of the rate increases. The governor commented that the timing and pace of those adjustments, if and when they come, will be a matter for careful consideration, taking into account all the relevant factors including what might be happening with market interest rates. While the economy is returning to high levels of growth there is still some fragility in the economy. Unfortunately unemployment could still rise and manufacturers and other export-based industries are under pressure from the strong Australian dollar. The bank must be certain that any rate rises during the next 12 months do not work against the economy’s return to trend levels of growth. Conversely, the Reserve Bank needs to ensure that inflationary forces are kept in check and that medium-to-long-term inflation is forecast to be in the target band. These challenges are why the next hearings with the Reserve Bank in February and later in August 2010 are significant. The Reserve Bank has an important responsibility to the Australian community and it will need to account for its performance, particularly during the cycle ahead.

On behalf of the committee I would like to thank the Governor of the Reserve Bank, Mr Glenn Stevens, and the other representatives of the Reserve Bank for appearing at the hearing on 14 August. I would also like to put on record on behalf of the committee our thanks to the secretary and the secretariat generally for the work they have done with this committee. The next public hearing will be on 19 February 2010 in Canberra. I commend the report to the House.