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RBA stimulated by economic debate -

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ELEANOR HALL: But we begin today with the debate about Australia's economy and whether the Federal
Government's fiscal stimulus measures should continue.

It seems that some members of the Reserve Bank board have doubts about whether the recovery is
genuine.

The minutes at the latest meeting of the Reserve Bank board reveal an internal debate about whether
Australia's surprisingly strong economy is a product of temporary fiscal stimulus or whether it's
in fact sustainable growth.

Economics correspondent Stephen Long has been analysing the RBA minutes and he joins us now. So
Stephen, what is the essence of this debate?

STEPHEN LONG: Eleanor, the question that's vexing the mind of the Reserve Bank board members seems
to be whether this is a natural expansion, whether the economy is growing in a sustainable way, or
whether it is merely because of the edition of that fiscal Viagra.

And really when you look at it, the minutes are heavily sanitised but the messages are there in the
language. To quote one of the phrases in the minutes 'members noted that it was still unclear how
much of the greater than expected recent buoyancy of the economy might have been due to the
temporary effects of the recent fiscal stimulus.

And they added a particular source of uncertainty was whether the recent growth in household
spending was mainly due to the temporary fiscal measures, in which case it would probably soon
fade, or a more general decline and risk aversion.

Now that leads them to the debate about what they should do in terms of their own policy on
interest rates. They note the risk of an early tightening choking off confidence in the economy and
demand prematurely.

ELEANOR HALL: Well, we have been hearing some interesting comments from Reserve Bank board members
about interest rates. What do you think this means for the Bank's interest rate policy?

STEPHEN LONG: What I think it means is that they won't be in a hurry to life rates. A rates rise
isn't imminent. They will want to have evidence, clear evidence, that the recovery is entrenched,
that it is sustainable and it isn't merely a product of that fiscal stimulus that's been applied by
the Federal Government.

In particular they will be looking to see what happens to retail sales and consumption now that the
cash handouts are dwindling and moving out of the system.

ELEANOR HALL: Now this board meeting was held on the fourth of August. Since then there has been a
run of good economic news. Presumably that's likely to further build the confidence of Reserve Bank
officials?

STEPHEN LONG: Indeed! I think you've got a situation here where the Reserve Bank officials do have
a fairly strong level of confidence. One of the questions we don't know from the minutes because
it's not disclosed who said what is whether the doubts about the recovery and how much it's reliant
on the fiscal stimulus and how much it's actually a natural and sustainable expansion is coming
from the business members of the Reserve Bank board and the independent members and how much it's
coming from the officials and the staff.

But look at what we've seen recently Eleanor. We've seen Germany and France, two of the biggest
economies in Europe, unexpectedly post economic growth. We've seen Japan post economic growth
coming out of a very, very long recession, the longest since the Second World War.

And there's two things here, one is the evidence that there is some recovery going on. But the
other one is the boost to confidence, because they're relying a lot on confidence to keep the
economy growing once that fiscal Viagra is taken away, lest it droop.

Unless there's actually a genuine sense that it can be maintained and the public and business have
that sense. Now, of course, there are risks. There's still a lot of toxic debt in the banking
system and the Reserve Bank itself has said that the recent pace of growth in China is clearly not
sustainable.

ELEANOR HALL: Stephen Long, our economics correspondent thank you.