Australia's Central Bank Chief Optimistic on Economy

Australia is in a good position to defend itself against the global economic crisis despite a bleak report that forecasts a possible recession in 2009, according to the central bank chief.

Countries with tight monetary and fiscal policy settings are better able to cope with the current economic climate, Reserve Bank of Australia Governor Glenn Stevens said.

"The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness," Stevens said at the Committee for Economic Development of Australia annual dinner Wednesday night.

"Those countries which went into this episode having practiced disciplined macroeconomics policies over many years, and I would include Australia in this group, will tend to be the ones which find themselves with the most scope to move in an expansionary direction," he said.

But his comments failed to boost the stock market Thursday, with the benchmark S&P/ASX 200 sliding 3.97 percent, or 138.9 points, to 3360.7 in the hour after opening. The market tends to follow Wall Street, where the Dow Jones industrial average dropped below 8,000 points for the first time since 2003 at Wednesday's close.

Stevens' speech came hours after the release of a monthly index that showed Australia's growth rate had fallen 2.4 percent from August to September -- the biggest monthly fall since the mid-1980s -- and predicted a poor outlook for 2009, including the possibility of a recession.

The Westpac-Melbourne Institute Leading Index points to the likely pace of economic activity three to nine months into the future.

A recession is defined as two straight quarters of negative growth.

Australia has not posted negative growth this year but has revised its growth estimates downward. The Reserve Bank of Australia predicted earlier this month that economic growth would slow to 1.5 percent instead of 2.0 percent before year-end.

Stevens said policymakers must remain ready to act promptly to support the financial system and sustainable economic activity, and governments must consider worthwhile public investment "even if that involves some prudent borrowing."

The central bank has cut the official cash rate by 200 basis points in the past three months, and economists predict it could be reduced by a further 75 basis points when the bank meets on Dec. 2.

"In the period ahead, we shall be seeking to strike the right balance between, on the one hand, the need to have inflation come back down, albeit slowly, and on the other hand, the desire to avoid as far as possible an unnecessary weakening in demand," Stevens said.

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