RBA addresses CEDA

Full presentation here

There are reasons to expect that the Australian economy can continue to perform better than its international counterparts in the difficult period that lies ahead. Australia had more momentum than most comparable economies in the period leading into the crisis. As in other countries, substantial monetary and fiscal measures have been taken to support growth. But an important difference is that the Australian financial system remains in much better shape than its international counterparts. As a result of that, we have been able to gain much more traction from cuts in official interest rates. In the period since the RBA started cutting the cash rate in September, substantial rate cuts have been passed through to end borrowers, particularly for housing loans. This is in marked contrast to other countries, where banks have been more heavily affected by financial strains and the degree of pass-through has been much more limited. Another factor helping to insulate the domestic economy from events abroad is the depreciation of the exchange rate.

Having said all that, there’s no doubt that Australia will be operating in a difficult international environment this year. Official forecasts, including those of the IMF, imply that output in the major industrial economies will contract further in the first half of this year, but start to pick up later in the year and into 2010. The situation is still very uncertain but, for the reasons I’ve been outlining, that seems like a reasonable expectation.