THE Reserve Bank's deputy governor Ric Battellino has dashed hopes for interest rate cuts, saying markets are mistaken in their belief that Australia's economy will be dragged down by the US. Mr Battellino said Australia's fortunes were being shaped by China and it had scarcely skipped a beat since the global financial crisis.
Financial markets have been trading on the basis that a rate cut at the Reserve Bank's meeting next month is more likely than not, while they expect rates to be down to 3.25 per cent -- their level during the global financial crisis -- over the next 12 months.
"Markets do seem to have reached a pessimistic assessment and this appears to be based mainly on the assumption that weakness in the US and Europe will flow through to Australia," Mr Battellino told a conference in New York organised by Euromoney magazine. However, he said Australia's economic path had diverged from that of the US over the past 20 years.
"The United States is still struggling to recover from the deep recession caused by the sub-prime crisis, while Australia, having grown for 20 years, is operating with relatively little spare capacity and is investing heavily to meet rapidly growing demand for resources from China and elsewhere in Asia."
Mr Battellino said financial markets were making the same error today that they made between 2002 and 2003, when they tipped rate cuts on the strength of a stalling US economic recovery. The Australian economy remained strong and rates were raised.
Mr Battellino said the US still had some influence on Australia, but it was outweighed by China.
"It is too early at this stage to judge with any degree of certainty whether Australia will catch cold from the US," he said. "However, given that over the past 10 to 15 years the Australian economy has been less vulnerable to severe US symptoms, there are reasonable grounds for optimism."
The latest information showed that China's economy remained strong, while Australia's shipments of coal and iron ore, and the prices for both commodities, were firm.
Mr Battellino revealed that the Reserve Bank was not yet convinced that the official jobs figures, showing the unemployment rate had risen by 0.4 percentage points in the past two months, were correct.
He said it was odd the Australian Bureau of Statistics survey showed the increase in unemployment was biggest in the resource- rich states.
"An independent indicator, the number of people on unemployment benefits, does not point to any rise in unemployment."
He said the latest national accounts for the June quarter did not give any hint of weakness.
"Households are spending more on entertainment, eating out and travel, particularly overseas travel."
The International Monetary Fund last night released its twice yearly review of global financial stability.
It said that the crisis in Europe and the US had moved beyond concerns about sovereign debt to become a political crisis.