In The Press   PAGE 1

Page 1 | Page 2 | Page 3 | View All

Reserve Bank slashes interest rates in response to global financial crisis

7 October 2008

The Reserve Bank has reduced the official cash rate a full 1 percentage point to 6 per cent in response to the crisis that has gripped global financial markets in recent weeks. The RBA's statement, which announced the largest interest rate cut since the recession in 1992, noted that a sharp economic slowdown is now a greater risk than inflationary pressures. The global financial system has come close to collapse in recent weeks, with markets gripped by fear as several major banks have collapsed and many more have been sold to other institutions to stave off collapse. The financial crisis, widely regarded as the worst since the Great Depression of the 1930s, is the result of a sequence of events that began in August 2007 as a result of a fall in US housing prices exposing financial institutions to large losses on 'sub-prime' mortgages. The crisis has escalated sharply in recent weeks, prompting large falls in stockmarkets and raising the prospect of a major global recession. Despite a $US700 billion emergency rescue package to allow the US administration to stabilise banks by buying up their troubled assets, investors appear to be losing confidence in the capacity of the US to avoid a deep recession. Although Australia has so largely avoided the chaos in financial markets in the US and Europe, the global slowdown is certain to have a major effect on economic growth. The five year run of a soaring terms of trade has come to an end, with recent weeks witnessing a fall of around one third in metals prices, also bringing the Australian dollar down from a peak of US98c in July to below 70c in October. Analysts are now expecting further interest rate cuts in coming months as the RBA seeks to avoid Australia following other economies into recession.

Free Trade deal with ASEAN and New Zealand concluded

28 August 2008

Representatives from Australia, ASEAN and New Zealand have concluded the largest free trade agreement in Australia’s history. The agreement, to be known as AANZFTA will result in substantial liberalisation in trade in goods, services and investment. Most importantly, free trade in agriculture has been included as part of the agreement. The Department of Foreign Affairs and Trade has commented that this agreement is the largest which ASEAN has ever negotiated. According to the DFAT press release, the agreement will cover goods and services, investment, intellectual property, competition policy and economic cooperation. According to the Australian Financial Review, the agreement will also include substantial liberalisation in the agricultural sector, with reductions to protection on such exports as wine, beef and dairy products, but not sugar. When measured collectively, ASEAN is Australia’s largest export destination, larger even than Japan or China (both of whom Australia is currently negotiating separate free trade agreements with). The agreement should help to boost Australia’s level of service exports to the Asia-Pacific region as well as Australia’s FDI outflows. However, despite the success in concluding the negotiation, the issue of protection in the Malaysian and Indonesian motor vehicles industry remains unresolved. Both Malaysia and Indonesia heavily protect their domestic motor vehicles market and have been reluctant to agree to significant cuts to their motor vehicle tariffs. The AANZFTA agreement, which comes on the back of more than three years of negotiations is expected to boost GDP within the Asia-Pacific region by $US48 billion by 2020.

Speculation of falling interest rates causes a sudden depreciation of $A

22 August 2008

Between July and August of 2008 the Australian dollar plummeted 13 per cent against the US dollar to reach its lowest level since 23 January 2008. Increasing signs of a slowdown in the domestic economy have led the RBA to comment that interest rates are likely to fall at its next board meeting, causing speculators to drive down the Australian dollar. The depreciation was less severe against the Trade Weighted Index, which fell by only 9.3 per cent. This reflects the fact that the US dollar has also appreciated recently, with some economists suggesting that the US may have intervened directly in the FOREX markets to slow the fall of the US dollar. Such a large swing in the Australian dollar over mere speculation of a possible interest rate cut demonstrates the volatility that the globalisation of financial flows can cause in a small open economy such as Australia.

Doha Round collapses over agricultural protection

1 August 2008

The Doha Round has once again broken down as developing and high income economies clashed over the troublesome issue of agricultural protection. In the lead-up to the July ministerial conference, members of the WTO had narrowed down the number of disputed in their revised negotiations texts. However, the issue of agricultural subsidies remained a significant point of disagreement. Agricultural trade accounts for only 8 per cent of global trade and developing economies argue that this is due to the trade-distorting subsidies of high income economies. Developing economies have persistently complained that the US and the EU were not making a genuine effort to limit their agricultural subsidies, and have refused to accept any deal which would not limit the overall level of global subsidies. In the July negotiations, the US had offered to cap its subsidies at $14.5 billion, which is greater than its expenditure over the past year. As a result, the Geneva negotiations broke down on the 29th July, postponing the completion of the round until at least after the US election in late 2008. With the poor negotiations record of the round – its failure to achieve consensus on agriculture and its constant pattern of breakdowns and revivals, it is possible that the round may never be completed, leaving the future of the WTO in doubt.

G8 climate negotiations draw fire from developing countries

21 July 2008

Developing countries have unanimously criticised the leaders of the eight largest industrialised countries represented at the recent G8 summit hosted by Japan. The so-called G5 nations - China, India, Brazil, Mexico and South Africa - have voiced their frustrations regarding the developed world’s failure to make significant strides towards adopting long-term, sustainable measures to tackle climate change. While G8 leaders at the recent summit signed an agreement to “consider and adopt the goal of achieving at least 50 per cent reductions in global emissions by 2050”, developing countries argue that emission cuts should be as high as 80 - 95 per cent for the developed world. Furthermore, developing countries claim that the ‘50 per cent’ target agreed to by G8 leaders at the summit does not specify a base year for those reductions, paving the way for disputes over whether reductions will apply for current emission levels or 1990 emission levels. Furthermore, the United States’ compliance with the G8 agreement was conditional upon the participation of China and India. As both of these countries immediately rejected the imposition of specific reduction targets, the value of the G8 agreement has been brought into question. These difficulties arise amidst a wider dispute between the developed and developing world over who should bear the economic cost of responding to climate change; those that have already contributed to it substantially (developed countries, such as the United States) or those that will contribute to it in the future (rapidly developing countries, such as China and India).

Oil prices hit a new high and prompt G8 fears

7 June 2008

Oil prices have hit a new record of $US139.12 a barrel. The rise poses significant problems for major economies already hit by the fallout from the US sub-prime mortgage market and ensuing fears of a potential US recession. Oil prices had eased earlier in the year after many economists began to predict a soft-landing for the US economy; the US dollar began to stabilise and damaged credit markets signalled a potential emergence from disorder. However, the combination of recent rises in the US unemployment rate and the specter of higher interest rates in Europe prompted a sharp fall in the US dollar. As the price of oil is pegged to the US dollar, falls in the greenback are accompanied by gains in oil prices. In recent times, high oil prices have been driven by a few principal factors. In particular, the falling US dollar, political instability plaguing the Middle East, rising demand from major developing economies and a prolonged surge of speculative transactions around oil prices have all contributed to their historic rise in recent times. The rise also prompted significant concern from the 11 nations represented at a recent G8 meeting hosted by Japan. Collectively, the nations called for major oil-exporting nations to increase investment into energy sectors and lift production in order to meet growing global demand and partially offset rising oil prices.

Stronger than expected growth figures renew fears of further rate rises

4 June 2008

Contrary to expectations of a sharp slowdown in Australia’s economic activity, official growth figures for the first quarter have proven stronger than expected. Sound business investment and resilient consumer spending have prompted a 0.6 per cent increase in GDP for the first quarter of 2008 and a 4.4 per cent increase over the year. Prior to the release, financial markets had expected a 0.2 per cent increase for the first quarter and a 2.8 per cent increase over the year. And whilst Treasury has predicted that growth over 2007-08 will slow to 3.25 per cent, at current trends this seems unlikely. While household spending contributed to growth, it still fell to 0.7 per cent in the first quarter, down from a 1.7 per cent jump in December 2007. Overall, however, the economy’s apparent resilience to higher interest rates, soaring fuel prices and a more uncertain global economic climate has sparked fears of further interest rate rises by the RBA in their attempts to reduce demand and soften domestic inflationary pressures. After an aggressive tightening of monetary policy between August and March, the RBA decided to leave interest rates on hold yesterday at their 12-year high of 7.25 per cent. However, today’s stronger than expected data prompted speculation of future rate rises, leading to a minor surge of speculative transactions around the AUD and a half-a-cent rise in its value against the US dollar.

Australia's CAD continues to widen

3 June 2008

Australia’s current account deficit widened further in the March 2008 quarter, moving upwards from 6.1 per cent of GDP in December 2007 to 6.4 per cent of GDP in March 2008. The widening deficit, driven by weaker export figures, was primarily a consequence of flooding in Queensland and Western Australia, resulting in the closure of various shipping ports and mines and thus lower exports of coal and iron ore. However, rising servicing costs for Australia’s $725 billion foreign liabilities stock continued to drive the record-high net income deficit, which stood at 4.2 per cent in March 2008. Nevertheless, recovery from flooding is expected to prompt a bounce-back in commodity exports throughout the next quarter, leading some economic commentators to suggest that the recent widening of the CAD is merely a short-term aberration that does not hold any larger implications for the Australian economy.

WTO criticises US anti-dumping practices

15 May 2008

In a recent dispute settlement proceeding at the end of April, the WTO firmly criticised a US anti-dumping procedure described as ‘zeroing’ – a method of manipulating price comparisons between imported and local goods to make imports appear to be “dumped” goods, thereby allowing the local country to impose compensating duties under WTO rules. While this manipulative practice has now been struck down by the WTO, the US has in return criticised the Dispute Settlement Body for “making” WTO rules, rather than simply “interpreting” them, as it is designed to do. This continues a series of high-profile decisions made by the DSB in 2008, including its first decision against China taken in March this year.

Global food crisis becomes top priority on development agenda in mid-2008

10 May 2008

In recent weeks, senior officials at top development organisations have warned about the prospects of an impending global food crisis. According to the World Bank, food prices have doubled in the past three years, with a 40 per cent increase in the past ear alone, and almost 100 million people face the risk of grave malnutrition in 2008-09, largely in Africa and Asia. Leading politicians around the world have responded by promising increased levels of food aid, with the USA announcing that it will offer US$770 million in food crisis aid to developing countries in early May 2008, in addition to US$550 million already being considered. The current food shortages may constitute the first real food crisis since the Second World War.

Page 1 | Page 2 | Page 3 | View All