Australia Has Scope to Slash Rates to Offset Turmoil, OECD Says

Australia has scope to cut interest rates should Europe’s sovereign-debt crisis stall global growth, the Organization for Economic Cooperation and Development said, a scenario investors already are betting on.

If downside risks to the international economy materialize, “monetary policy should be eased significantly to sustain demand in the context of moderating inflation,” the OECD said in its economic outlook released in Paris today. Australia’s government could also boost spending, it said, though that would delay a pledged return to a budget surplus in 2012-13.

The OECD predicts the nation’s economy will expand 4 percent next year, driven by mining investment and elevated commodity prices, after 1.8 percent growth this year. The estimates were lower than May forecasts for 4.5 percent growth in 2012 and 2.9 percent this year, reflecting threats Europe’s crisis pose to growth in Asian nations that buy Australian iron ore and coal.

Australia’s central bank responded to the heightened global risks and weaker inflation pressure by lowering its benchmark rate by a quarter percentage point to 4.5 percent on Nov. 1, the first reduction in 31 months. Swaps traders wager policy makers will need to cut again and reduce borrowing costs by more than 1.5 percentage points over the next year, a Credit Suisse Group AG Index shows.

Less Room

In New Zealand, while the central bank has less scope to reduce rates from the current record-low 2.5 percent, it could do so in the event of a global slowdown, the OECD said.

“With core inflation and inflation expectations still above the mid-point of the Reserve Bank’s 1-3 percent inflation target band, the room for interest rate cuts may be limited,” the OECD said. It said New Zealand would also need to be cautious in its fiscal response to a global downturn.

“Whereas net public debt is low, fiscal space is limited by global financial-market turbulence, given the dependence on external borrowing by banks and, increasingly, the government,” the OECD said. “Whereas automatic stabilizers should be allowed to work in the event of a sharp downturn, the underlying consolidation program should continue.”

New Zealand’s economy is projected to grow by 2 percent to 3 percent over the coming two years as reconstruction from an earthquake in the southern city of Christchurch in February gains momentum and export commodity prices remain high, it said.

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