Reserve Bank Governor, Glenn Stevens, has rejected claims from some commentators and politicians that the Australian economy is “too strong”.

In a speech in Perth this morning he said the “period of greatest weakness in the Australian economy is probably past. Barring another serious international setback, the economy is likely to continue on a path of gradual expansion during 2010.”

The speech was his first public comments since the central bank lifted interest rates a week ago last Tuesday by 0.25% to 3.25%. His comments this morning underline the belief that interest rates will move away from what he has termed an ’emergency’ setting towards one which is first ‘easy’ and then ‘neutral’.

Expectations are that rates will be increased again at either the November or the December RBA board meetings.

Mr Stevens’ comments today won’t change that view, but reinforce it as he makes clear that the economy is now back on track, having escaped the global crunch with only a passing blow.

He seems determined to avoid making a mistake and fluffing the recovery and aborting it, or allowing the rebound to get a head of steam and charge unchecked into a boomlet and then perhaps a bubble, with all the inflationary dangers that go with that.

Consumer and business confidence has recovered strongly, housing is solid, thanks to the first home buyers grants, car sales remain solid as well, again thanks to the tax allowance, jobs were created last month and retail sales seem to have continued growing, despite the impact of the stimulus easing

None of this is to say that the economy is, at this moment, “too strong”. It isn’t, Mr Stevens told his Perth breakfast audience.

He went on:

The point is, rather, that the very low interest rate settings were designed for a weaker economy than we are in fact facing. Plainly, the downside risks to which the Board was responding earlier have not materialised.

This is not a problem. In fact, it is a very desirable situation.

It is a welcome contrast to the experience of a number of other countries. It is simply something we need to recognise in setting monetary policy – which means not holding interest rates at very low levels when that is no longer needed.

The Board is also conscious, though, that a risk-management approach requires policy to be recalibrated as circumstances change. If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework. Experience here and elsewhere counsels against that approach.

That being so, those of us involved in monetary policy must turn our thoughts to encouraging the sustainability of that expansion.

This is particularly the case for monetary policy given the lags in its impact. In conducting monetary policy during this expansion, our objectives will be the same as they were in the previous one: to keep inflation low; to react in a measured but prompt fashion to changes in the risks facing the economy; and, in so doing, to play our part in fostering a long, sustainable period of growth.

Mr Stevens and the RBA have long been more optimistic about the impact China was having on the economy, and would have, despite the crunch. Figures out on Wednesday suggest that confidence hasn’t been misplaced. Chinese exports were the best this year and imports jumped sharply, thanks in part to higher imports of iron ore, especially from Australia. Third quarter growth figures in a weeks’ time in China will also confirm that.

Peter Fray

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