RBA Says Australia Must Maintain Fiscal Tightening

Reserve Bank of Australia Assistant Governor Philip Lowe
Reserve Bank of Australia Assistant Governor Philip Lowe speaking in Sydney in March. Photographer: Ian Waldie/Bloomberg

Australia’s government needs to stick to its goal of bringing the budget into surplus over the next three years or risk increasing pressure on inflation, central bank Assistant Governor Philip Lowe said today.

“If this lift in saving does not occur, then demand in the economy could well be stronger than forecast, and this would put additional pressure on capacity,” Lowe said in a speech in Sydney. Sustaining low inflation requires “growth in demand not to outpace expansion of supply,” he said.

This month’s turmoil on global financial markets, triggered by concerns about European debt, underscores the dangers of a “lack of fiscal discipline,” Lowe said. Treasurer Wayne Swan said this week the budget will return to surplus by 2012-13, three years earlier than forecast six months ago. Australia also leads Group of 20 nations in boosting borrowing costs after six central bank rate increases in seven meetings.

“Low and stable inflation has clearly been one of the critical elements in Australia’s good economic performance” over past decades, Lowe told the Colonial First State Investment Forum. “We need to make sure this continues.”

The Australian dollar rose to 89.88 U.S. cents at 12:19 p.m. in Sydney from 89.49 before Lowe’s speech was released. The currency has gained 19 percent in the past 12 months. The two-year government bond yield climbed 3 points to 4.77 percent. A basis point is 0.01 percentage point.

Employment Growth

Australian employers added 33,700 workers in April, led by hiring in New South Wales and Queensland, a report showed today. That beat the median estimate of 22 economists surveyed by Bloomberg News for a 22,500 gain.

The central bank, which forecast last week that growth in gross domestic product will almost double to 4 percent by late 2012, has built its prediction on the assumption that more of the nation’s income from exports such as iron ore, coal and energy will be saved than during the boom that preceded the global financial crisis, said Lowe.

“This reflects two factors,” he said. “The first is the different position of the federal budget and the second is the more cautious approach to spending currently being displayed by the household sector.”

Swan this week released the government’s annual budget, and forecast a A$1 billion ($900 million) surplus in 2012-13, from a A$40.8 billion deficit in the year to June 30, 2011. He said he’ll also keep a 2 percent cap on spending growth until the surplus reaches 1 percent of GDP.

Public Debt

The pledge reflects concern that investors will punish countries that fail to rein in deficits, which swelled during the world recession. Australia, whose public debt is projected to peak at 6.1 percent of GDP, is benefiting from Chinese demand for its resources, and the surplus forecast is aided by a proposed “super” tax on miners.

Events in Europe this month “again remind us of the very hard choices that countries can be forced to make if prudent policies are not implemented in the good times,” said Lowe, who heads the central bank’s economics department.

“In these countries, the capacity to use countercyclical fiscal policy to support aggregate demand has been diminished because of the lack of fiscal discipline in more tranquil times,” the assistant governor said.

There are signs that a European Union-organized package of almost $1 trillion is helping to stabilize markets, which declined this week on concern the measures won’t halt the region’s fiscal crisis.

Stocks Rally

Stocks rallied yesterday, with the Standard & Poor’s 500 Index recovering losses from its May 6 plunge, as a successful Portuguese bond sale and planned budget cuts in Spain and the U.K. bolstered optimism the debt crisis is subsiding.

“Restoring confidence is clearly a necessary step in what will be a very difficult road ahead for a number of countries,” Lowe said today.

Had concerns about public spending in Greece been “left unchecked, these events had the potential to lead to a widespread retreat from risk-taking by investors, damaging the recovery in the world economy,” he said. “The path ahead is likely to be a difficult one for many of the advanced economies.”

Australia’s jobless was unchanged in April from a revised 5.4 percent the previous month, the statistics bureau said today. The unemployment rate in the U.S. was 9.9 percent in April, and 10 percent in March among European Union countries, the highest rate since August 1998.

‘Fortunate Position’

“We are operating closer to full capacity than other developed countries, and the challenges we face are quite different to the ones that they face,” Lowe said today. “A major challenge will be to expand the supply side of the economy so that demand can grow solidly without adding to inflation.”

“At the same time, we need to be aware that circumstances can change quickly,” he said. “If they do, Australia is in the fortunate position, as are a number of countries in Asia, of having the policy flexibility to be able to respond.”

Central bank Governor Glenn Stevens and his board increased the overnight cash rate target by a quarter percentage point last week to 4.5 percent. The bank has boosted the rate six times since early October, when it stood at a half-century low of 3 percent.

Investors say Stevens is certain to raise the benchmark rate to 4.75 percent in November, and there is a 56 percent chance of a move by early September, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 8:41 a.m.


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