RBA To Work Harder With Further Reduction In Spending

Australia today sees the swearing in of its 28th prime minister, with Tony Abbott pledging to rein in spending even as the growth outlook weakens — stepping up challenges for Glenn Stevens, who begins his final term as central bank governor with the cash rate at a record low.

The divergence of monetary and fiscal policy in the world’s 12th largest economy raises the risk of tension between Abbott, 55, and Stevens, 55, who was reappointed by the previous administration. The Reserve Bank of Australia has to contend with the danger of distorting asset prices from any extension of a policy easing cycle already two years long.

“Stevens is trying to steer a path between avoiding asset bubbles, particularly in the real estate sector, and keeping the Australian dollar from going too high,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “He’s also reaching a point where on perceived wisdom, he’s very close to the terminal rate of policy.”

Stevens yesterday said 2.25 percentage points of reductions to a record low 2.5 percent are already providing “a substantial degree of policy stimulus.” Abbott has pledged to terminate 12,000 civil service positions and is targeting a budget surplus of 1 percent of gross domestic product in a decade.

Bloomberg

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