Rba Shows Way

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November 1st, 2011

SMALL businesses, consumers, prospective homebuyers and mortgage-holders will all cheer the decision of the Reserve Bank board to ease the official cash rate by 0.25 percentage points, coming as it has in the lead-up to Christmas and the traditional summer break for many people.

A week ago, as European leaders were struggling to pull together a unified response to the Greek debt crisis, the RBA's economic advisers might have contemplated a more dramatic reaction to a possible Lehman Brothers moment in the eurozone, which could have seen credit markets freeze and the global financial system teeter on the brink.

Fortunately, the Europeans were able to put together the bones of a response, although doubts remain about whether flesh can be added in the weeks ahead. Leaders of the G20 meeting this weekend in France should add their considerable influence to the voices urging Europe not to shirk the task before them.

In Australia, dramatic economic action is not on the domestic agenda because of the fundamental soundness of our national accounts and the fiscal and monetary room to move in the event of a deterioration in prevailing conditions. Inflation, which was a concern earlier in the year, has moderated, although the underlying rate, while showing no signs of breaking out of the bank's comfort zone in the immediate future, still needs to be monitored.

The relative tightness of the labour market has not given way to a wages outbreak and most employers are continuing to hold on to staff despite weakness in some sectors. At the same time, new jobs growth has been disappointingly feeble. The high dollar continues to challenge trade-exposed sectors and expose those, like tourism, that are at threat from a robust exchange rate to a much greater extent. The RBA is right to draw attention to moderate growth following a peak in the terms of trade, a sustained resources boom and "cautious behaviour by households" - the very description of a patchwork economy - which is underlined by poor infrastructure and constraints in parts of the country and sluggish retail sales in general.

It would have been wrong for the retail banks to ignore the message from the Reserve Bank and hold back or withhold completely the passing on of this first rate cut in more than two years to small businesses, consumers and homebuyers, which is why the swift action by Westpac, the Bank of Queensland, the Commonwealth and others was welcomed. The most recent Australian Prudential Regulation Authority figures record that banks took in an additional $12.3 billion in deposits in September, highlighting the fact our banks are now much less reliant on overseas sources for borrowings.

Yesterday's rate cut is a reminder of the Australian economy's strength and resilience through the global financial crisis and the ability to respond to conditions as they evolve.

While the European sovereign debt problems remain and the economy in the US appears unable to spring back to life, Australia will be vulnerable to external shocks. We need to work together as a community to maintain the advantages we have as a protection against any ill winds.