Australia can handle EU`s woes: RBA

Australia is in the "best position" to weather the debt crisis gripping Europe, even
if the situation deteriorates, Reserve Bank of Australia (RBA) governor Glenn
Stevens says.
The latest reading of consumer confidence released on Wednesday showed that
households are fretting about the ripple effect from Europe's woes that has led to a
sharp drop in the Australian dollar and share prices.
But the central bank boss says even if there is a deeper knock-on effect from the EU
crisis, Australia has the advantage of low government debt, declining budget
deficits and a banking system that is in good shape with little exposure to problem
European states.
Europe also accounts for only five per cent of Australia's exports.
"The flexibility afforded by our floating currency, coupled with credible monetary
and fiscal policies, are all advantages in periods of global uncertainty," Mr
Stevens said, addressing a business function in western Sydney.
"These factors put us in the best position to ride through this particular event,
even if it does get worse."
The Westpac-Melbourne Institute consumer sentiment index dropped a further 5.7 per
cent in June, even though the RBA left the cash rate unchanged at last week's board
meeting.
The index fell 7.0 per cent in May after the central bank raised the rate for a
third month in a row to 4.5 per cent.
Westpac chief economist Bill Evans blamed deteriorating conditions abroad and market
upheaval for the latest sentiment fall, which has now recorded its largest two-month
drop since March 2008 at 12.3 per cent.
Consumers, like business, are also concerned about the uncertainty surrounding the
federal government's proposed mining super tax.
The latest reading of business confidence, released on Tuesday, fell eight index
points, led by a 30-point tumble among mining companies.
'Budget and tax' headed the news items recalled by consumers at 55 per cent, the
highest proportion since the introduction of the GST.
"The perception was negative, with a clear majority of those recalling the issue
saying they viewed it as unfavourable," Mr Evans said.
This category scored an index of just 48 points, and below the 100 level that
separates favourable and unfavourable responses.
International conditions also rated highly at 32 per cent among recalled news items,
the highest since the 1997/98 Asian financial crisis, and even higher than during
the global financial crisis.
Other data showed demand for mortgages sank for a seventh straight month in April to
the smallest number of loans in nine years at just 47,669, a seasonally adjusted 1.8
per cent decline from March.
Mr Stevens told the conference that borrowing has become more cautious, despite low
levels of unemployment.
"Of course this will have been affected by the recent increase in interest rates,
but the level of rates is not actually high by the standards of the past decade or
two."
He described the 4.5 per cent cash rate as 'normal' when taking into account bigger
increases in lending rates at retail banks.
Economists widely expect the RBA to leave the rate unchanged again when its board
meets in July.
Macquarie Bank interest rate strategist Rory Robertson said the June quarter
consumer price index due in late July will be the next "make or break" release for
rates.
"Markets also are aware that the longer the sharp downshift in global equity and
commodity markets continues, the longer policy will stay firmly on hold," he said.