Tony Pearson, Deputy Chief Economist at ANZ provides his thoughts on the current global financial crisis and how Australia is managing the impacts from around the world.

The global financial crisis rolls on, over a year after it began in July 2007. This crisis began in the US, but has now spread to engulf most of the developed world. Global asset markets remain volatile. Prices in key asset markets are now falling, including shares, commodities, and, in some countries, prices of houses and commercial property. Some big name financial houses have failed. Governments in some countries are now using public money to take equity stakes in failing institutions – effectively nationalising them – or to assume some of the risks which are crippling financial flows. And economic growth has slowed sharply in most developed countries, with the US, UK and Europe either already in recession or heading that way. We have not seen a global financial crisis of this magnitude or duration in our lifetime.

Amidst this chaos Australia remains a centre of relative calm. The problems from which this crisis stemmed have nothing to do with Australia. Australian banks have little direct exposure to the financial losses which have crippled many overseas institutions. Our banks remain tightly regulated, well capitalised, profitable, and are able to access required sources of funding from both onshore and offshore markets. Banks remain able and willing to lend to creditworthy borrowers. The four major banks in Australia are rated AA, among the highest rating of any banks globally. Only 8 other banks out of the world's largest 100 banks have a rating equal to or higher than the four major Australian banks.

Having said that, we need to recognise that Australia is part of a global financial system, and so has not been able to completely escape some of the impacts of global events. The most direct consequence has been higher interest rates on borrowings by banks, as lenders have sought to compensate for increased risk by charging a higher price for money. One response of banks has been to increase interest rates on deposits from retail investors so as to reduce their reliance on wholesale sources of funds. Retail depositors in Australia have not enjoyed such attractive returns for over a decade.

The Reserve Bank of Australia is now seeking to compensate for these higher market funding costs by reducing the official cash rate. The idea is to achieve some reduction in the cost of credit to end borrowers, both households and businesses. The first reduction of a quarter of one per cent took place in the first week of September, and additional cuts in the official cash rate are expected before the end of the year.

The Australian economy continues to perform solidly. Although economic growth slowed over 2007 and in the first half of 2008, this was not an accidental result of the financial market turmoil or slowing in the growth of developed countries. Rather, it was mostly an intended cooling of economic activity, engineered by the Reserve Bank in order to mute inflationary pressures which had risen to uncomfortably high levels. Although the economic outlook has become more uncertain, we expect that the Reserve Bank and the Commonwealth Government will be able to continue to "fine tune" the economy, to hold growth slightly below its long term sustainable pace so as to further cool inflationary pressures, but not so low as to produce undesirable impacts on households and businesses.

This article was written to provide you with Tony Pearson's views on current Global Financial crisis and how Australia is managing the impacts from around the world.

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