Australia's financial system was healthier than other countries

RBA governor Glenn Stevens says the economy faces a 'difficult year ahead' | The Australian

NOTHING could have protected Australia from the fallout of the financial crisis, and we face a difficult year ahead, RBA governor Glenn Stevens says.

And it is unlikely interest rates will drop to zero, he told a House of Representatives Economics Committee hearing.

So many countries have lowered their benchmark interest rates to zero or near enough "that it no longer matters''.

"It is not my present expectation we're going to find ourselves at nothing,'' Mr Stevens said.

Australia's cash rate of 3.25 per cent is one of the higher cash interest rates in the advanced world.

Mr Stevens said that no policy could have protected the economy from the effects of the global economic crisis.

"The deterioration in international conditions was so rapid that no policy response could prevent a period of near-term weakness in the Australian economy or for that matter other economies,'' Mr Stevens said.

"We are being effected by the global downturn and we cannot realistically expect other than weak conditions, at least in the first part of 2009."

"This is a weak near-term outlook to be sure.''

Mr Stevens said large interest rate cuts, the stimulus plans and a lower exchange rate will support demand "increasingly so as the year goes on''.

"Australia will come through this episode not unscathed, but well placed to benefit from this,'' he said.

"Things will be difficult over the next year.

"But as I have said before, the long-run prospects for Australia have not deteriorated by as much as we may all be feeling just now.''

China's growth not yet finished

Mr Stevens said China, one of Australia's biggest trading partners, still had plenty of growth potential.

"China's emergence, for example, has not finished. It has years to run and Australia will benefit from it,'' he said.

"We can have confidence in our long-run future and in our demonstrated ability to adapt to changing circumstances.

"If we retain that, there is no reason for any downturn to be a deep one.''

Australia's financial system was healthier than other countries, he said.

"Credit standards do seem to have tightened further over recent months and banks are seeing the inevitable increase in bad debts as the economy slows.

"But our major financial institutions are still in a strong condition, have access to debt and equity markets, are still earning good profits, and are in position to lend for sound proposals.''

Mr Stevens said housing affordability was likely to improve.

"Our housing sector is not overbuilt; instead there is considerable pent-up demand, and affordability is improving quickly,'' he said.

Mr Stevens said the effects of interest rate cuts - 400 basis points since September last year brought the cash rate to 3.25 per cent - were only beginning to impact.

"Those effects are yet to be seen in many of the figures, though they are being felt in businesses around the country. The effects of the policy adjustments are only beginning.