Benign economic situation means RBA should be steady as she goes

Monday, 5 May 2014  Media Alerts

“Could the economic situation get more benign than it is at the moment?” asks the UNSW’s Australian school of Business Tim​ Harcourt. "The last consumer inflation report was right in the middle of projections, the Australian dollar is firm – maybe a tad too firm – while unemployment is a little weak – but way better than forecast and down from recent highs – so on the whole the Reserve Bank of Australia would be quite right to leave official interest rates on hold at Tuesday’s board meeting.”

If interest rates aren’t cut, this will mark the eighth meeting in a row that interest rates have remained unchanged. Furthermore if the RBA will continue to retain its neutral policy bias, he said this would herald for the first time in many years a long period of stability in interest rates, and with those rates at historic lows.

Could the economic situation get more benign than it is at the moment?

- Tim Harcourt, J.W.Nevile Fellow in Economics, ASB

Tim Harcourt, the J.W.Nevile Fellow in Economics at the Australian School of Business said “recently Governor Stevens suggested that the incentives between savings and spending in the Australian economy are about right. Ultimately monetary policy can’t do the spending for you – we have to do it, but Australian’s are by and large a prudent bunch. The only signal leading to a rate rise is that unemployment has recently fallen to 5.8%, however inflation is also falling – down to 0.6% in the March quarter - compared to 0.8% in the December quarter. So on the whole, it’s a steady, well managed ship.”

He has also compared Australia and its moderate wage growth with economies in many other parts of the world. “By contrast, the US labour market is in crisis with 90 per cent of workers having not had real wage rise in 20 years, the minimum wage has been frozen and yet US unemployment is higher than Australia’s. The post war implicit contact between American business and workers has been broken as the nexus between productivity growth and real wage growth has diverted and executive salaries have exploded despite an underperforming US corporate sector.”

“Compared to that, with low unemployment and low inflation, we’re laughing. Australia’s economy is doing well, and any talk of a budget crisis is pure fantasy” he said.

For further comment call Tim Harcourt on 02 9385 3816, 0408 485 479, or Email tim.harcourt@unsw.edu.au.

Media contact:

Julian Lorkin: 02 9385 9887

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