Michael Heath and Andy Sharp Bloomberg.com 14 October 2012
Reserve Bank Governor Glenn Stevens said Australia has room to adjust interest rates in response to a global slowdown as Treasurer Wayne Swan called on European nations to balance economic growth with fiscal tightening.
“On monetary policy, we have ammunition,” Stevens said at an Oct. 12 seminar at the International Monetary Fund’s annual meeting in Tokyo. “Unusually for an advanced country, we actually have materially positive interest rates, so if needed we have scope to move there as long as inflation is okay, which at present it seems to be.”
Enlarge image Reserve Bank of Australia Governor Glenn Stevens
European leaders must implement policies that boost growth and ensure sustainable budgets, Swan said yesterday in an e- mailed statement. The RBA has “maximum flexibility” to reduce the key rate if needed as the government returns Australia’s finances to surplus, he said.
Stevens has adopted a gloomier outlook in the past month, ending a three-meeting pause when he lowered the benchmark rate to 3.25 percent on Oct. 2, in a reversal from a June speech when he said he felt the need to do some “cheerleading” on the economy to rebut vocal pessimists. Prices for Australia’s key commodity exports fell to a more than two-year low in August as Europe’s fiscal crisis weighed on global growth.
Traders are pricing in a near certainty the RBA will reduce the key rate again next month, swaps data compiled by Bloomberg show. That would match the 50-year low of 3 percent at the height of the 2008-2009 global financial crisis. The Australian dollar has dropped 2.2 percent against the U.S. currency in the past month, the biggest decline among the Group of 10.
Stevens said at the Oct. 12 seminar that Australia’s banking system is profitable and well-capitalized, and the nation’s finances are strong.
“The government’s in deficit right now but looking to be in surplus before long and have very little debt,” he said. “I think we go into a global slowdown in reasonable shape.”
Swan and Prime Minister Julia Gillard have pledged to return the federal budget to surplus in the 12 months to June 30, ending four years of deficits. The task has become more challenging as weaker commodity prices squeeze government revenue and a darkening global outlook saps confidence.
“These headwinds mean we’ll have to find some substantial savings to return the budget to surplus,” Swan said in yesterday’s statement. “A surplus is our best defense in uncertain times for the global economy and shows we are committed to responsible budget management.”
While policy makers need to contain risks, they must dedicate themselves to lifting global growth, Swan told the International Monetary and Financial Committee in Tokyo Oct. 13.
“Putting fiscal positions on a sustainable footing needs to be done hand-in-hand with supporting growth -- this does not need to be one or the other,” he said.
Europe’s debt crisis, now in its third year, is sapping expansion in Asian exporting nations from China to South Korea and Taiwan. Bank of Israel Governor Stanley Fischer said during the weekend that the world is “awfully close” to a recession.
While there has been “a lot of progress made” to improve the global economy, its impact hasn’t materialized, Fischer, the IMF’s No. 2 official from 1994 to 2001 and a former Citigroup Inc. vice chairman, said in a Bloomberg Television interview in Tokyo Oct. 13.
“It’s pretty slow right now. Europe is technically in a recession, the U.S. is predicting less than 2 percent growth for the next few months.”
Australia posted its widest trade deficit since 2008 in August, with imports exceeding exports by A$2.03 billion ($2.08 billion), according to an Oct. 3 government report.
The nation’s jobless rate climbed to a 2 1/2-year high of 5.4 percent last month, from 5.1 percent in August, statistics bureau data showed Oct. 11. Queensland recorded the biggest job losses, shedding 20,900 as the state’s unemployment rate climbed to 6.3 percent, the highest level in three years.
The northeastern state’s coal industry warned yesterday that the Queensland government’s increase in royalty rates is likely to lead to more job losses.
“In the face of a cost-price squeeze and intensifying competition, coal companies are naturally reviewing current and proposed projects,” Michael Roche, chief executive of the Queensland Resources Council, said in a statement. “Job losses resulting from the reviews are in the thousands.”
BHP Billiton Ltd., the world’s biggest mining company, and Xstrata Plc last month announced almost 900 job cuts across their coal mines in Australia as they scale back production because of falling prices. Rio Tinto Group will shed jobs as it adopts a more cautious outlook, Chief Executive Officer Tom Albanese told a media briefing on Oct. 9.
Australia’s economy grew about 4 percent in the first half, driven by mining investment and consumer spending.
“Returning the budget to surplus remains appropriate for an economy growing around trend and is our best defense against global instability,” Swan said in Tokyo on Oct. 13.