Financial thoughts

Threats of a “global catastrophe'' have declined in recent weeks as policy makers around the world work to restore liquidity and confidence in the financial system, Australian central bank Governor Glenn Stevens said.

“At moments like this, it's hazardous to make predictions,'' Stevens said today in a speech in Sydney. “However, it seems to me that the key elements of dealing with the root issues in the crisis are starting to come into place.''

Governments and central banks in the world's biggest economies have cut borrowing costs and boosted liquidity and capital for banks to ease a credit freeze that triggered the biggest swings on financial markets since the 1987 stock-market crash. The turmoil prompted Stevens to unexpectedly slash Australia's benchmark rate this month by 1 percentage point to 6 percent, the biggest reduction since a recession in 1992.

“Policy makers in the major countries do `get it','' said Stevens in the speech to members of the Trans-Tasman Business Circle. Plans to restore stability “are not precisely uniform across countries — that is never achievable, anyway — but we can, I think, see the shape of a broad common outline.

“As a result, the likelihood of a global catastrophe has declined over the past couple of weeks.''

The benchmark S&P/ASX 200 Index of stocks, mirroring gains in Asia, climbed 2.7 percent to 4,254.3 at 1:15 p.m. in Sydney, adding to a 4.3 percent advance yesterday that has pared its drop this year to 33 percent.

Currency, Bonds

Australia's dollar traded at 69.91 U.S. cents from 69.81 cents before Stevens' comments were released. The two-year government bond yield rose 7 basis points, or 0.07 percentage point, to 4.29 percent.

Stevens said his decision to cut borrowing costs on Oct payday loan cash advance loan. 7 was taken even though inflation in Australia is “likely to remain high in the period immediately ahead.''

“Looking forward to next year, forces seem now to be building that will start to dampen pressures on prices, even though we won't have evidence for that for a good six months,'' he said.

Members of the bank's board said in minutes of their October meeting, published today, that increased risks to Australia's economy provided a “strong economic case'' for the larger-than-expected rate reduction.

Inflation Report

Annual inflation probably accelerated in the third quarter to 4.8 percent from 4.5 percent in the previous three months, according to the median estimate of 16 economists surveyed by Bloomberg News. The prices report will be released tomorrow at 11:30 a.m. in Sydney.

Policy makers, who aim to keep price gains between 2 percent and 3 percent on average, seek “to respond to the medium-term outlook for prices, not just the current data,'' Stevens said today.

The Australian dollar's 21 percent decline against the U.S. currency this year “also amounts to a significant change for the trade-exposed sectors of the economy, though at the cost of some temporarily higher price rises,'' the Governor said.

“These changes will act to lessen the extent of the likely slowdown in Australia's economy, even as global forces work the other way.''

China, Australia's largest trading partner, will “probably grow pretty strongly, on average, over many years,'' thought it is slowing now, Stevens added.

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