Aussie Strength Allows Economy to Run Lower Rates, Swan Says
“Australia is now seen as a necessary part of any portfolio, whether it be private or public investors -- and these investment flows have propped up our sustained high dollar,” Swan said in a speech in Melbourne yesterday. “This, combined with our fiscal consolidation and contained inflation, has all meant that our economy has more room to run lower rates than we have in the past.”
By highlighting the benefits of an elevated local dollar, Swan is pivoting from his past concern about the impact of its strength on industries including manufacturing and tourism. The change of focus coincides with a rebound in the government’s ratings in opinion polls and follows the steepest rate cuts among major developed economies in the past year.
Swan and other ministers have pressed the central bank to lower borrowing costs and stimulate the economy as the government bids for a A$44 billion ($46 billion) swing back to the black in time for an election due by late next year.
There has been “a rebalancing in monetary and fiscal policy, which has not been widely remarked upon,” Swan said in the speech to the 2012 Economic and Social Outlook conference before he heads to a Group of 20 meeting in Mexico.
The government, in a midyear review released in Canberra last week, forecast a budget surplus of A$1.08 billion in the 12 months ending June 30. It recorded a A$43.7 billion deficit last fiscal year.
Swan is trying to end four years of deficits as prices ease for key exports in response to a slowing Chinese economy.
Commodity prices fell 2.2 percent in October from the previous month in Australian dollar terms, a Reserve Bank of Australia gauge showed yesterday. The index has slumped 19.1 percent over the past year, it showed.
The RBA reduced the overnight cash-rate target by 1.5 percentage points to 3.25 percent since November last year. Traders are pricing in a 51 percent chance the central bank will cut rates again next week, according to swaps data compiled by Bloomberg.
The ruling Labor Party has narrowed the opposition Liberal- National coalition’s lead among voters and drawn level, according to a Newspoll survey published in the Australian newspaper on Oct. 29.
Prime Minister Julia Gillard’s government is benefiting from lower borrowing costs in an economy where about 90 percent of mortgages have floating rates.
Australia’s core consumer prices rose an average 2.5 percent last quarter from a year earlier, in the middle of the central bank’s target range, a government report showed last month. The nation’s unemployment rate was 5.4 percent in September.
Australia has lost 37,000 manufacturing jobs in the past two years and 70,000 in construction in the past 12 months as the currency’s strength, fueled by investors seeking exposure to China’s demand for resources, lowers import costs.
RBA Deputy Governor Philip Lowe this week addressed the connection between his nation’s elevated currency and higher returns available relative to economies such as the U.S. and Europe where rates are near zero.
The local dollar, which has surged 54 percent in the past four years, traded at $1.0404 at 9:13 a.m. in Sydney.
In the speech yesterday, Swan said he will urge G-20 colleagues to support jobs and growth in the near term in order to avoid putting more pressure on a “rickety” global recovery.
The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the International Monetary Fund said Oct. 9. That compares with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013.
“I, for one, don’t think a global growth rate with a three in front of it is going to cut the mustard,” Swan said. “That kind of growth is not enough to make inroads into reducing the stubbornly high rates of unemployment in much of the developed world, and so is not a sustainable path for our future.”
In a statement today, the treasurer also said he plans to meet with U.S. Congressional Budget Office Director Douglas Elmendorf “to get a first-hand assessment of the risks presented to the US economy from the fiscal cliff.”
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