Gillard Says 2013-14 Budget Allows Scope for RBA Rate Cuts

Australian Prime Minister Julia Gillard said that her government’s “tight” fiscal stance leaves room for the central bank to cut interest rates as manufacturers try to cope with sustained currency strength.

“I don’t think our current fiscal position in any way reduces the scope” for the Reserve Bank of Australia to lower borrowing costs, Gillard, 51, said in an interview yesterday in her office in Sydney, the nation’s business capital. “We are keeping a limit on expenditure” and will move to a surplus over time, she said ahead of the May 14 annual budget release.

The government will champion initiatives to help industrial companies strengthen innovation and productivity in the face of a “new normal” strong exchange rate, the prime minister said. While Australia’s so-called two-speed economy has left the mining sector propelling growth, in time a swelling Asian middle class will allow the nation to diversify, she said.

“Our success as a resources economy, as an economy that’s emerged from the global financial crisis strong, has meant that our Australian dollar has been very high,” Gillard said hours after meeting with business leaders advising the government on its 2014 presidency of the Group of 20 nations. “This is the new normal and it’s putting pressure on businesses in areas like manufacturing.”

Dollar Surge

Australia’s dollar has appreciated 75 percent against its U.S. counterpart since late October 2008. It retreated as much as 0.2 percent today after Gillard’s comments were published, and traded at $1.0544 at 5:08 p.m. in Sydney.

A government report yesterday showed the nation’s jobless rate unexpectedly rose to a three-year high of 5.6 percent. The report, showing that employers cut payrolls by 36,100 in March after a 74,000 increase in February, came days after General Motors Co.’s Holden division said it will cut about 500 positions in Australia. Holden said the strong local dollar and currency devaluations in competing markets had made operations in the nation among the most expensive in the world.

Gillard said “inevitably there’s volatility in monthly figures,” when asked about yesterday’s employment data. “But we’ve created 50,000 jobs since the start of this year, we’ve created 100,000 in the last 12 months, we’ve created almost 900,000 in the time since we’ve been in office during the worst global economic circumstances since the Great Depression.”

Traders priced in a 54 percent chance the RBA will lower the benchmark rate to a record low of 2.75 percent in August, according to swaps data compiled by Bloomberg. Earlier in the week, there was a less than 50 percent chance of a reduction.

Growth Dampers

Australia’s exchange rate, a deceleration in resource investment from a peak this year, and tightening of government spending are likely to hurt growth in 2013, central bank Assistant Governor Christopher Kent told the Bloomberg Australia Economic Summit April 10. The RBA in February predicted a “below trend” increase of 2.5 percent for gross domestic product in 2013, down from an estimate of around 2.75 percent in November.

The national budget fell further behind projections in February, taking the deficit to A$23.6 billion ($24.9 billion) for the first eight months of the financial year, according to Treasury figures released today. The gap in the financial year to Feb. 28 was A$5.7 billion wider than was projected in the government’s Mid-Year Economic and Fiscal Outlook, primarily due to lower tax revenue and higher personal benefit payments, the statement said.

Budget Outlook

In its October mid-year review, the government forecast a budget surplus of A$1.08 billion in the 12 months through June. It recorded a A$44 billion deficit last fiscal year.

Gillard is campaigning to reverse a 10 percentage-point gap in opinion polls behind a political opposition led by Tony Abbott in the run-up to national elections on Sept. 14. Abbott has attacked the government over busting its budget pledge, with his Shadow Treasurer Joe Hockey two days ago predicting the deficit will be worse than anticipated.

“We’re now getting less revenue per unit of GDP than any time since the nation emerged in the 1990s from a recession,” Gillard said. Policymakers will nonetheless maintain focus on education and training programs key to diversifying the economy, she said.

With the strong currency, “if you did nothing and just let it do its work in the economy, you could wake up in a few years’ time with an economy that had whole segments of it hollowed out.”

China’s Urbanization

Gillard said China’s urbanization will continue to drive Australian exports. As the Asian nation’s middle class grows, her country stands to benefit from demand for non-resource exports including processed foods, tourism, and financial and legal services.

Direct trading between the yuan and Australia’s dollar reached A$250 million on its first day, Gillard said after returning from a visit to China. The volume reflects the economic benefits of the accord announced this week she said. The Australian dollar follows the greenback and the yen in being able to be traded directly with the yuan.

“For most of my life people have thought about our location in the world as a net disadvantage because we were remote from the moneyed people of Europe and even from the U.S.,” Gillard said. “Now, our location in the world is a huge advantage as the world’s biggest middle class takes shape.”

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