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Friday, October 31, 2008

Now even the Reserve Bank is using the 'R' word

A senior Reserve Bank official has conceded that Australia may be unable to escape falling into a worldwide recession as the Prime Minister has called on Australia’s banks to support troubled market-linked funds.

The Reserve Bank’s Deputy Governor Ric Battelino told a bankruptcy conference that while it was true that Australia managed to sidestep the 2001 global recession, the question now was, “can it do it again?”

While he said that while that was what “we are aiming for” and that there was “nothing in the data to date to suggest we are off track” Australia was being buffeted by powerful forces and that it was “unclear” what the net effect would be.

The statement, also contained in the printed version of the speech distributed by the Bank, is its first public acknowledgment that Australia might well fall into a recession. Previously the Bank has only referred to outcomes such as “a deeper and more persistent slowing in the economy”...

It follows forecasts by JP Morgan and Deutsche Bank of negative economic growth in the current quarter and forecasts by Westpac and JP Morgan of negative or zero growth in the following quarter.

The Prime Minister rejected talk of a recession, telling Fairfax radio that the most recent forecasts in front of him continued “to have positive economic growth into 2009”.

Speaking to the Business Council Mr Rudd called on Australia’s banks to consider advancing money to more-troubled financial institutions.

“The banks are the beneficiaries of banking licences, and the Government’s guarantee on deposits and wholesale funding, the Prime Minister said.

“It is not unreasonable, therefore, to expect that the banks will play a continuing role in supporting the wider financial system and thus the Australian national interest.”

He has asked has asked the Chairman of the Future Fund David Murray, a former head of the Commonwealth Bank, to work with the Treasury in its dealings with distressed institutions.

In another development the Reserve Bank Deputy Governor warned that there were limits as to how far the Reserve Bank would cut interest rates in order to avoid a recession.

“The task of managing the economy this time will be more difficult than in [the global recession of] 2001 because we are starting with bigger inflation,” he said, adding that “this could limit room for manoeuvre on monetary policy”.

Financial markets took his comments to mean that a November rate cut of more than 0.50 percentage points was less likely than they had believed. Futures traders cut the implied probability of a 0.75 points cut from 94% to 77%, however they were still pricing in a 100% likelihood of a 0.50 points cut.

Mr Battellino also explained that there was no “line in the sand” beyond which the Bank would stop supporting trade in the Australian dollar, a remark that helped push up the Australian dollar 0.70 US cents as he spoke.

He said that rather than attempting to maintain any particular price, the Bank was buying Australian dollars where needed to ensure that the market remained liquid.