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Reserve rates recovery -

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ELEANOR HALL: Regardless of the predictions of some, a year on from the collapse of Lehman Brothers
Australia's Reserve Bank is optimistic about the global economy.

However it's not yet convinced that any recovery will be sustained.

The minutes of its board meeting this month show the central bank board members conscious that
there are still a lot of risks to growth and stability.

And they suggest that the Reserve Bank will be in no hurry to lift interest rates.

Our Economics correspondent Stephen Long has been analysing the board minutes at a lock-up at the
RBA headquarters in Sydney and he joins me now in the studio.

Stephen, the tone then is not as bullish as some might have expected?

STEPHEN LONG: No it's not bullish Eleanor. I would call it balanced rather than bullish, with the
Reserve Bank board acutely aware that although things seem to be recovering there are a lot of
risks out there.

And I'll just quote from the minutes which pretty much sums up their concern, they say an important
question for members was whether the global economic improvement would be sustained or whether it
was mainly a reflection of the strong macro-economic stimulus that's been applied over the past
year and might in due course fade.

So in plain English - once the government money washes through, all the handouts and the fiscal
stimulus and the low interest rates - will we actually get an economy in recovery, or will we be
left with a global economy that is still constrained?

And again the Reserve Bank board notes this by banks, corporates and households having to face
significant balance sheet adjustments.

In plain English: having too much debt and having to run it down, and that would constrain
consumption, investment and growth.

ELEANOR HALL: Of course here in Australia, the national accounts that came out after that board
meeting showed that the Australian economy posted reasonable growth in the second quarter, would
that convince the Reserve Bank board that growth is sustainable?

STEPHEN LONG: Not necessarily. The Reserve Bank notes, for example, that we saw a pickup in
business investment but that could easily be a pull forward of business investment due to the tax
breaks that were offered for investment in machinery and cars and the like, and we could see it
slump in the second half of the year.

We know business credit is still down, the same applies to the consumer spending and they noted in
the minutes that consumer spending had softened in July but their business liaison said it was
going to strengthen in August.

Well on the official estimates, the opposite happened and we had a further seasonally adjusted fall
in consumer spending in August.

And they noted the resilience of the labour market in these minutes and after that we've had jobs'
figures that showed a loss of nearly 31,000 full-time jobs and a continuing fall in work hours.

So since the board of the Reserve Bank met, most of the indicators have been weaker than expected
and already they were casting doubts on the sustainability of the recovery.

So, no they won't necessarily feel that we are in a solid and sustained economic growth, and that
we've come out of this unscathed just because we saw growth in the second quarter of this year.

ELEANOR HALL: So is there doubt then, that the Reserve Bank will in fact lift rates in the near
future?

STEPHEN LONG: There's no doubt that they will lift rates. The question of course is when and by how
much.

Now, I mean, it's possible they won't lift rates if we get another crash or more extreme volatility
and instability in the global economy which is a real risk.

But if present trends continue they will want to lift rates because they're at emergency settings
as the Reserve Bank has said, and if there's no emergency they'll want to bring them back to a more
normal setting.

But the tenor of these minutes does not imply that they will be looking to move imminently.

Now the market economists who are going around fairly recently in suggesting that they would be
looking to move in October - well that analysis is dead in the water.

And I'll just finish by explaining to you at the conclusion of these minutes was that they'd stay
on hold, pending further evaluation of incoming information at future meetings.

Now I suggest the plural the "S" on the end of "meeting" is deliberate.

ELEANOR HALL: Stephen Long our economics correspondent thank you.