Bank Comes About: Slow And Steady As She Goes

The Age

Wednesday December 3, 2008

TIM COLEBATCH

YESTERDAY'S interest rate cut ends the second stage of the Reserve Bank's response to the debt-driven world slump. Next year it will move on to stage three, which is likely to see subtler responses.

Stage one began in July when the Reserve realised there was a serious risk that the slump would be deep and long, and Australia would be very much part of it. In August, it flagged it would change course, and in September, gave us a small rate cut.

Stage two began immediately afterwards, when the collapse of Lehman Brothers turned a market crisis into a sustained panic that has wiped away trillions of dollars.

In 10 weeks since, the Reserve has cut its cash rate from 7 per cent to 4.25 per cent, the most aggressive rate cuts in modern times. It has clearly learnt from its mistake in 1990, when after using an express lift to hike cash rates to 18 per cent, it then used the stairs to slowly lower them bit by bit.

The cuts are welcome, even if they will have only a marginal impact while confidence is depressed. As confidence gradually stabilises then rebuilds, low interest rates will encourage investment that will drive the rebound.

But a careful reading of yesterday's statement by governor Glenn Stevens suggests we should not expect these deep cuts to continue next year.

Stevens argues that government and central bank action to stabilise financial systems has begun to take effect. He notes yesterday's cut takes the cash rate to its previous cyclical low. He concludes that the major easing in monetary policy, the Government's new spending and the fall in the exchange rate make up significant policy stimulus ... supporting demand over the year ahead.

The bank's board will not meet again until February. By then, Stevens hopes, the panic will be gone, and any further policy shifts will be smaller.