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The Reserve Bank of Australia reiterated its hawkish stance on monetary policy on Friday, but did not elaborate on the timeline for future interest rate raises.
RBA Governor Glenn Stevens said in his testimony to the House of Representatives Standing Committee on Economics in Canberra that the Australian economy is well placed to benefit from its ties to Asia and that higher interest rates will be needed as the recovery gathers steam.
"If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent with the target over the medium-term," said Stevens. "This is a normal experience in an economic expansion: as economic activity normalizes, interest rates do the same."
Reaffirming the view from this week's February board minutes, Stevens said monetary policy was no longer at emergency levels, but was not quite back to normal range either. "If you looked at the borrowing rates being actually paid on average by both business and housing borrowers, they are still below what I would call an average for the past decade or so," he said. "They are probably between 50 and 100 points below that average."
The central bank chief noted that Australia faced different challenges to its counterparts in 2010, with the economy having a relatively limited spare capacity. "With the economy having had only quite a mild downturn, we start the new upswing with less spare capacity than would typically be the case after a recession," he said.
He said the central bank must shift its attention to the challenges of managing an economic expansion. "Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage, as they should," he added.
Stephen Walters, an economist at J.P. Morgan, said the RBA is in no hurry to raise the cash rate again. The economist expects the central bank to raise rates by another 125 basis points over the remainder of 2010, but put off the next increase until April.
The Australian central bank surprised markets earlier this month by deciding to hold the overnight cash rate at 3.75% after delivering three successive increases.
Stevens was also quizzed as to the possibilty of Australia defaulting on its debt, after Nationals Senator Barnaby Joyce expressed concern on whether the country will be able to repay its borrowings. The Reserve Bank governor dismissed out of hand the possibility of a default, saying "there are few things less likely than Australia defaulting on its sovereign debt".
"Our sovereign position could not be more different, really. There has never been an event of sovereign default by Australia as far as I know, and I very much doubt there ever will be," he commented.
The RBA expects the Australian economy to grow about 3% in 2010 and 3.5% in both 2011 and 2012. The outlook for the Australian economy is upbeat and this economic upswing begins with considerably less spare capacity than normal, economists at Westpac said. They expect the cash rate to rise to 4.5% in 2010 and are looking forward to an increase in March.
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