Bloomberg News

Parkinson Says RBA ‘Well Placed’ to Respond to Sluggish Growth

May 15, 2012

Australia’s Treasury secretary said the nation’s central bank is “well placed” to respond to weak growth with more interest-rate firepower than other advanced economies.

“If subdued growth in the non-mining economy results in further increases in spare capacity, putting downward pressure on inflation, monetary policy is more likely to be an effective remedy as these sectors are typically more sensitive to interest rates and exchange rates,” Martin Parkinson, the Treasury’s top bureaucrat, said in a speech today in Sydney. Parkinson also sits on the central bank’s board.

The Reserve Bank of Australia this month cut the overnight cash rate target to a two-year low of 3.75 percent from 4.25 percent, the deepest reduction in three years, after two quarter-point cuts late last year. Traders are pricing in an 86 percent chance the RBA will lower the rate to 3.5 percent next month, swaps data compiled by Bloomberg show, as bets rise that Greece will be forced out of the euro.

“The global outlook is still very uncertain, as it has been for some time,” Parkinson said. “We are particularly worried by the euro-zone situation, which is why our forecasts for European growth are markedly weaker than those of the International Monetary Fund.”

Even after the RBA’s May 1 rate reduction, Australia has the highest benchmark borrowing cost among major developed economies. Policy rates are near zero in the U.S. and Japan, 1 percent in the euro area and Canada, and a record-low 2.5 percent in neighboring New Zealand.

Mining Boom

Australia’s economy is being driven by the biggest resource bonanza since the 1850s as China and India increase demand for minerals and energy. In contrast, tourism, manufacturing and retail industries have suffered under the local currency’s sustained strength.

The Australian dollar, the world’s fifth-most traded currency, has gained 33 percent in the past three years as the mining boom spurs growth. It dropped below parity with the U.S. dollar this week for the first time since December on concern Greece will leave the euro bloc.

Parkinson praised the floating exchange rate, saying it has helped absorb the nation’s mining investment boom.

“While the high dollar weighed heavily on some sectors of the economy -- as it continues to do so -- it helped spread the benefits of the boom and shield the macro-economy from the shock by helping to bring down the price of imported consumer goods,” Parkinson said.

Fiscal Tightening

Australia’s economy faces headwinds after the government announced last week it will cut spending for the first time in at least 42 years as the government ends four years of budget deficits.

Prime Minister Julia Gillard is under pressure to revive parts of the economy not benefiting from the mining investment boom. The underlying cash surplus will be A$1.54 billion ($1.54 billion) in the 12 months to June 30, 2013, the government said May 8. Expenditures are forecast to fall to A$364.2 billion next year, the first drop in figures dating back to 1971.

Parkinson said Australia’s economy is in a good position to return to surplus.

“In an economy with unemployment forecast to be not far from reasonable estimates of its lowest sustainable rate, and commodity prices remaining near historical highs, it is appropriate that the budget return to surplus to remain consistent with the medium-term fiscal objective,” Parkinson said today.

‘Political Gesture’

He said the 2012-13 surplus goal isn’t a “political gesture” that could be delayed.

“The problem with this argument is that if it’s not appropriate to restore the structural budget position when we have low unemployment and the economy is expected to grow at around trend, when will it be appropriate?” he said.

Australia’s jobless rate fell in April to 4.9 percent from 5.2 percent in March as hiring accelerated in mining states including Western Australia, the statistics bureau said in Sydney on May 10. Economists forecast a rise to 5.3 percent.

The employment data contrast with reports in the past month showing the economy struggling to gain traction, with core inflation slowing to a 13-year low, export and house prices slumping, and consumer confidence weakening.

“To the extent there is weakness across the economy, monetary policy is well-placed to respond, unlike in many other advanced economies,” Parkinson said today.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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