Economy

RBA chief hints at another rate rise: Economy roundup

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Reserve Bank of Australia chief Glenn Stevens highlighted the inflation threat posed by the resources boom in a speech on Friday, dousing home-owners’ hopes of a short term rate cut.

Stevens told the American Chamber of Commerce the rapid rate of improvement in Australia’s terms of trade could be “seriously destabilising” if not addressed by Reserve Bank action.

“The very large change in prices for mineral and energy resources is the most expansionary external shock to affect the economy for 50 years or more. It has occurred at a time when the productive capacity of the economy has already been stretched by the long expansion,” Stevens said.

In news that will cheer entrepreneurs reeling from higher fuel costs, United Nations chief Ban Ki-moon has convinced Saudi Arabia to increase oil production in response to what he has described as unacceptably high fuel prices.

The Saudis will increase output to 9.7 million barrels per day in July, a rise of 6% over the production achieved in May and the highest production rate since August 1981.

But some experts have questioned whether the extra production will be enough to reduce prices, given the high level of demand and lack of oil stockpiles around the world.

On the sharemarket, the benchmark S&P/ASX200 index fell 20.7 points or 0.4% to 5,357.4 by noon, despite an initial surge in morning trade.

Shares in embattled investment bank Babcock & Brown, which fell 53% last week, have jumped by around 8% after the company told the market that a market capitalisation clause in its debt facility did not constitute breach of its covenants.

Babcock’s market capitalisation fell below $2.5 billion last week, giving its lenders the option of reviewing the terms of Babcock’s three-year, $2.8 billion debt facility. Babcock & Brown said in a statement that the banks have not yet made a decision on whether such a review action is appropriate.

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