Australia Has Less Room for Growth Without Inflation
“Monetary policy must therefore be careful not to overstay a very expansionary setting,” Stevens told lawmakers at a parliamentary committee hearing in Canberra today.
Policy makers said this week their decision to unexpectedly keep interest rates unchanged on Feb. 2 was “finely balanced” amid concern that European sovereign-debt risks may weaken the global economic recovery. Stevens said today borrowing costs in Australia are still between 50 and 100 basis points below what the central bank considers “normal.”
“Stevens is quite bullish on domestic growth, but whether that translates into a March hike is another matter,” said Adam Carr, an economist at ICAP Australia Ltd. in Sydney. “I don’t know what more they need to see to hike again — it should already be very clear cut.”
The Australian dollar traded at 89.25 U.S. cents at 9:56 a.m. in Sydney from 89.38 cents before the governor’s testimony began. The yield on two-year government bonds rose six basis points, or 0.06 percentage point, to 4.31 percent from 4.25 yesterday. A basis point is 0.01 percentage point.
Stevens was the first central banker in the world to raise borrowing costs three times last year, taking the overnight cash rate target to 3.75 percent in December from 3 percent at the start of October.
“If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent” with the bank’s target range of 2 percent to 3 percent, Stevens said.
Inflation expectations are “reasonably well anchored” and a stronger currency will continue to help in containing price gains over the coming year, the governor said.
Stevens’s testimony today came after the Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent, another step in the U.S. central bank’s gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed left the benchmark overnight lending rate in a range of zero to 0.25 percent at its meeting on Jan. 27.
Traders are betting there is a 38 percent chance of a quarter-percentage-point rate increase when the Reserve Bank of Australia next meets on March 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 10:02 a.m. Prior to today’s testimony, chances of a move stood at 40 percent.
“We’re still below normal, I would say, which hitherto has been the appropriate place to be,” Stevens said. “There’s a little distance to go before you could characterize interest rates as normal.”
Stevens said unemployment has peaked at less than 6 percent, “much lower than we or most others forecast.”
Australia is experiencing its biggest jobs boom in five years. Employers added 194,600 workers in the five months through January, cutting the unemployment rate to an 11-month low of 5.3 percent, almost half European Union and U.S. levels.
The jobs surge should help spur the economy, one of the few to skirt last year’s global recession after Prime Minister Kevin Rudd distributed more than A$20 billion ($18 billion) in cash to households and began spending another A$22 billion on roads, railways and schools.
Australia’s gross domestic product will probably expand by “a bit over” 3 percent in 2010 and about 3.5 percent in the following two years, Stevens said.
“Now we must turn our attention to the challenges of managing an economic expansion,” he said. “Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage.”