RBA Warns World’s Largest Banks Remain Weak

Post by NeilMc on September 2, 2009 · Under Australian Economy, Business News, banking, interest rates · Comment

The Australian central bank, the Reserve Bank of Australia left official interest rates unchanged at 3 per cent during its monthly meeting on Tuesday, and said that global economic recovery depended on the world’s largest lenders strengthening their balance sheets.

Despite holding interest rates steady, the RBA warned of the threat of inflation, increasing the prospect of at least one interest rate rise before the year is out.

“The board’s judgement is that the present accommodative setting of monetary policy remains appropriate for the time being. The board will continue to adjust monetary policy so as to foster sustainable growth in economic activity and inflation consistent with the target.” ,” RBA governor Glenn Stevens said in a statement.

The central bank’s major concern is that underlying inflation was not falling as fast as initially thought. The RBA’s target inflation rate range is between 2-3 per cent, however the most recent measure of underlying inflation stood at 3.9 per cent, well beyond the range that the central bank is comfortable with.

In the RBA statement Governor Stevens said that the biggest risk to global economic recovery was weakness in the world’s largest lenders. Despite that fact, Australia’s Big Four are amongst the highest rated and best capitalised banks in the world, having raised a combined $10 billion in fresh equity and possessing average tier-one capital ratios in excess of 8 per cent.

“Sentiment in global financial markets has continued to improve. But the effects of economic weakness on the balance sheets of financial institutions will still be coming through for a while. This constitutes one of the main remaining risks to the global expansion. For the recovery to be durable, continued progress in restoring balance sheets is essential.” Mr. Stevens said.

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