Australia to Ease Fiscal, Rates Support, Stevens Says
Australian government stimulus spending will need to be eased and interest rates raised as the nation’s economy expands, central bank Governor Glenn Stevens said.
“In due course, both fiscal and monetary support will need to be unwound as private demand increases,” Stevens said in Sydney today. “The bank has already signaled that interest rates can be expected, at some point, to move off their current unusually low levels.”
Without A$42 billion ($36 billion) in government stimulus, almost half of which has been distributed to households as cash, and a benchmark interest rate at a 49-year low of 3 percent, Australia’s economy would have slipped into a recession, Stevens said. Gross domestic product rose 1 percent in the first half of this year, boosted by consumer and government spending.
“This has been a good episode for Australia,” Stevens said in testimony to the Senate economics references committee. “We’re in recovery” and “it’s important these measures be wound back, and we’re on track” for that to happen.
The Australian dollar traded at 86.30 U.S. cents at 11:12 a.m. in Sydney from 86.63 cents before Stevens spoke. The two- year government bond yield rose 8 basis points to 4.19 percent. A basis point is 0.01 percentage point.
Price Bubbles
“There is no sense of urgency in the governor’s message today which would betray a predilection to hike rates at the October board meeting,” said Rob Henderson, chief economist at National Australia Bank Ltd. in Sydney. “But he is resolute that the current ‘emergency’ settings will be unwound at the appropriate time. He is determined to prevent price bubbles.”
Stevens, who faced questions from opposition Liberal party lawmakers and Greens Senator Bob Brown about whether stimulus spending should be withdrawn, said the government’s planned schedule of spending isn’t “terribly worrying.”
“I would hazard a guess that in five years’ time we’ll find the debt buildup isn’t as large as forecast,” Stevens said.
The government expects to post record budget deficits until 2016 as it boosts spending on roads, railways, schools and hospitals. Treasurer Wayne Swan said on May 12 that the shortfall will be A$32.1 billion in the year ending June 30, which is equivalent to 4.9 percent of GDP. Australia’s net debt will peak at 13.8 percent of GDP in fiscal 2014, Swan said.
Economy’s Performance
“My expectation is that the economy is performing a bit stronger” than forecast by the central bank and government earlier this year, the governor said. That will “help the budget through the natural growth in revenue.”
“People are realizing that, though things have been tough, the worst has not occurred and the future is looking brighter,” Stevens said.
Stevens, who slashed the overnight cash rate target by a record 4.25 percentage points between September last year and April, also said policy makers intend to raise borrowing costs to prevent a surge in inflation as the economy expands.
“Interest rates are unusually low, so that means we have some work to do at some point to head back to normal before we get the build up of problems we’ll get if we keep them too low for too long,” Stevens said.
Still, he said the benchmark rate won’t be raised rapidly to last year’s peak level of 7.25 percent. “In the near-term I don’t think that’s a likely prospect,” Stevens said.
Unemployment won’t reach the levels forecast by the government in May, Stevens said today. Treasurer Swan said at the time that the jobless rate, which was 5.8 percent last month, will peak at 8.5 percent by June 2011.
“If it peaks at 6 point something” that would be a “pretty low peak,” Stevens said. “We should be pretty glad if that occurs.”