KEY POINTS:
Reserve Bank of Australia (RBA) governor Glenn Stevens has defended his decision to hike interest rates across the Tasman.
He said today there has been a sharp reassessment of risk in global financial markets following the US sub-prime mortgage crisis.
"More recently, financial markets globally have become extremely skittish and there has been a sharp reassessment of risk and a sudden desire for liquidity," he said.
Mr Stevens said the problems in global credit markets were not sufficient to warrant a change in the RBA's current monetary policy.
The RBA raised the official cash rate to 6.50 per cent on August 8, its highest level since November 2006.
In considering the implications of the volatility, there were two questions to ask, Mr Stevens said.
"The first was whether there was information to suggest that financial developments were likely to make a sufficient difference ... to the global economy, and therefore the Australian economy and the inflation outlook, to remove the macroeconomic case for a 25 basis point adjustment to cash rates," he said.
"On balance, we judged that there was not.
"Downside risks to the US economy do appear to have increased over recent months, but in other parts of the world the growth outlook has, if anything, been marked higher recently."
The second question, Mr Stevens said, was whether a rise of 25 basis points in Australian cash rates would, in itself, be financially destabilising.
"No credible case could be made for that idea.
"In fact, it would probably have been more destabilising to expectations not to have carried out a policy adjustment that most people could see was needed."
- AAP
