Australia's Medium Term Prospects Remain Good, RBA's Stevens

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Australia's medium term prospects remain good, with the various policy measures being effective in supporting domestic demand, the Reserve Bank of Australia's Governor Glenn Stevens said Sunday.

In his opening statements to the Senate Economics References Committee, Stevens said the recession in Australia was mild in comparison to the recession seen in the 1970s, and in the early 1980s and 1990s, and was also better than outcomes seen in other countries.

The Governor said various economic indicators have shown improvements in recent months, like business and household confidence, which showed substantial pick up from their low points. Moreover, house prices were rising, and the share market was also showing increases. "People are realizing that, though things have been tough, the worst has not occurred and the future is looking brighter",he said.

On the external front too, the Australian economy was doing well, with terms of trade remaining high by historical standards and exports expanding supported by demand for resources. Further, the country's other Asian trading partners have also been performing well, he said.

Stevens said in recent months the economic growth forecasts have been revised up to reflect the effectiveness of the various policy measures in supporting demand. He said the peak effect of the various stimulus measures have probably passed now, and the extent of the support would be decreased further over the next year, if private demand shows an increase.

Moreover, with recovery in progress, the RBA could also push up interest rates from their current low levels. The interest rate currently stands at 3%.

The governor believes that at present the recovery was broadly in line with the central bank's expectations, and noted that in this case the fiscal and monetary policy were acting broadly consistently, as they did when they moved into expansionary mode when the economy was slowing.

Stevens said a certain amount of policy discipline would be required now. For the fiscal side, the governor said restraint was needed to bring back budget towards to show a balance and eventually a surplus, as required by the medium term fiscal commitment. On the monetary side, the inflation target band would help to guide the interest rates, he said. "These will be timely and ahead of a build-up of imbalances that would occur if interest rates were kept low for too long", he added.

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