The emergency is over, now for the recovery.
That’s the way Reserve Bank Governor, Glenn Stevens, painted the Australian economy in a speech in Perth yesterday.
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%.
The news saw the Australian dollar reach new 14 month highs above 92c. It closed around 92 cents early Friday morning.
Coupled with the increasing weakness in the greenback, the chances of the Aussie currency rising further and faster are on the cards.
The comments 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 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.
The Roy Morgan weekly consumer confidence survey showed a further rise in the wake of the RBA rate rise 10 days ago.
"Consumer Confidence is 128.2 (up 0.9pts in a week and up 24.8 pts in six months) according to the weekly Roy Morgan Consumer Confidence Rating conducted on the weekend of October 10/11, 2009. Consumer Confidence is now 38.7 points higher than a year ago, October 11/12, 2008 (89.5),” the Morgan release said.
It’s that confidence that is doing as much as anything to convince the central bank that Australia has put the crunch behind it.
"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.
"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 said.
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 week’s time in China will also confirm that.
And Mr Stevens revealed that the central bank was a bit better prepared for the sharp crunch in activity in the wake of the failure of Lehman Brothers, Fannie Mae, Freddie Mac and AIG from September through October a year ago.
"The Board’s view was that we should move to limit the downside risks to economic activity, to the extent it was feasible to do so while remaining consistent with the inflation target," he said..
"The Board had some earlier analysis available to it that proved to be helpful in coming to that decision.
"A year earlier, for the September 2007 meeting, the staff had prepared some scenarios for discussion.
"One of those was a sketch of what might occur if the financial crisis escalated badly and the global downturn turned out to be much more severe than then expected.
"The message from that work was that such an event, if it occurred, would probably require a very rapid response from monetary policy, in the direction of lower interest rates.
"That event did not occur for another year, but when it ultimately d
