Bank warns of financial upheaval

THE Reserve Bank of Australia warned the current calm in financial markets could be the prelude to a storm that could wreak havoc in the world economy.

A further sharp rise in oil prices, the collapse of a major bank or an unexpected jump in inflation could send the increasingly fragile global financial system into meltdown, it said.

Like some other commentators such as The Economist the RBA regards the boom in markets for shares, bonds and housing in many countries as unsustainable.

Its warning came as share prices in Australia reached a new high point, while a rush to invest in Australian bonds is pushing down long-term interest rates.

Figures released by the Irish Stock Exchange yesterday show the Irish market has paced ahead by over 10% in the current year to the end of September while most markets at this stage are way above the lows hit in 2003.

In its analysis the RBA, said “the preconditions are in place for quite abrupt swings in sentiment and a disruptive snap-back in pricing.”

The RBA pointed out the key measure of all the world’s share markets is now 62% higher than its 2003 nadir, with the biggest gains in the riskiest markets.