Speech Summary The World Economy and Australia

The speech starts by looking at the prospects for the world economy, based on the IMF's recently published forecasts, which show a modest improvement in growth over the next couple of years. It notes the extremely accommodative settings of monetary policy which remain in place in the major countries.

The speech observes that, globally, investment remains weak despite very low borrowing costs. It suggests that there may be various reasons for this, including that investors in real capital may have maintained their hurdle rates of return even though returns available on low-risk assets have fallen. The speech goes on to highlight some of the potential vulnerabilities that may be associated with the current build-up of financial risk-taking globally.

The speech then turns to look at how these global trends have affected financial and economic conditions in Australia and talks about how the economy is adjusting to the changes in the terms of trade. It offers some observations about the way that monetary policy is acting to support demand, including the various effects through the housing sector. It highlights that the Reserve Bank Board has kept the policy rate at a very low level for some time, and has indicated a willingness to lower it even further. But the speech also emphasises that the Board has been proceeding with both a degree of caution about the possible risks in the circumstances as well as a realistic assessment of how much policy can be expected to achieve in supporting the adjustment the economy needs to make.

The speech concludes by noting that, around the world, monetary policy alone cannot achieve a durable and sustainable increase in growth; other policies are key. In this context, there is a reminder of the importance of making good on the policy promises that were made at the G20 meetings in Australia in 2014.

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