Interest rate rises in Labor hands

THE head of the Reserve Bank has held out the prospect of continuing low interest rates, as long as Labor sticks to its pledge to restrain spending…
Explicitly acknowledging the link between government spending and interest rates claimed by the federal opposition, Glenn Stevens told a closed symposium in Sydney to expect ”a lengthy period of rather low short-term interest rates” if governments committed themselves to reducing debt.

Speaking to central bankers from around the world gathered to celebrate the Reserve’s 50th birthday, Mr Stevens speculated about how monetary policy should be handled if governments restrained spending to pay off debts, creating a drag on economic growth. ”The straightforward answer is presumably that it would remain more accommodative than otherwise,” he said.

He said there might be ”attractions” for governments in doing so as it would make it cheaper for them to pay off their debts, and keep interest rates low for private borrowers as the economy recovered.

The opposition’s treasury spokesman, Joe Hockey, said the speech was ”a complete endorsement of everything we have been saying”.

”We’ve been saying for months that government spending puts upward pressure on interest rates. The governor has confirmed it emphatically in this briefing.”

The government has already promised to hold real spending growth to 2 per cent a year once economic growth returns to trend, and to hold it there during the five or so years it will take to return the budget to surplus.

Mr Hockey said the governor’s words showed it needed to go further. ”Mr Stevens refers to what would happen if there was ‘relatively rapid fiscal consolidation’. If it’s not rapid that means rate rises are the government’s fault.”

But while holding open the prospect of a long period of low rates Mr Stevens also indicated that the thought disturbed him.

”If it continued after the financial sector repair had largely been completed, it would raise its own set of questions about financial stability,” he said.

Suggesting that in future the setting of interest rates might take account of their effect on instability as well as inflation, he asked ”whether monetary policy can plausibly escape any responsibility” for helping to create booms and busts. He said that until recently it was thought central banks should do no more than ”clean up after” busts.

Mr Stevens told the governors he suspected they had a moral duty to do more, and to target excessive growth of asset prices and debt and risk taking as they became apparent.

”This amounts to an argument to err on the side – much earlier in the process – of not keeping interest rates unusually low,” he said.

Such an approach might require a rewriting of the agreement between the governor and the treasurer which requires the bank to focus on consumer rather than asset-price inflation.

A spokesman for the Treasurer, Wayne Swan, said Mr Stevens was ”clearly and expressly discussing the situation relating to governments around the world which have dramatically higher debt levels than Australia. ”Governor Stevens has clearly said he is very comfortable with the government’s fiscal position,” he said.
SOURCE: Peter Martin – Sydney Morning Herald



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