Reserve Bank of Australia (RBA) governor Glenn Stevens says Australia’s medium term prospects are good as the economy emerges from the global economic downturn, and has again signalled that interest will rise.

“I have maintained throughout that Australia’s medium-term prospects remained good and that we should not lose confidence,” Mr Stevens told the Senate Economics References Committee on Monday.

“More people seem to be taking that same view.

“Measures of business and household confidence have shown a very substantial pick-up from the low points reached earlier this year.”

Mr Stevens said told the committee, which is inquiring into the federal government’s fiscal stimulus measures, that by the standards of past weakness, this had been a “mild downturn”.

“Although the evidence is as yet incomplete, this episode has been much less serious that those in the mid- 1970s, the early 1980s and the early 1990s,” he said.

“It has also been very mild indeed in comparison with recent outcomes in many other countries, where deep recessions have been experienced.

“It is reasonable to conclude, against the benchmarks of historical and international experience, that Australia has done quite well on this occasion.”

Mr Stevens reiterated that the fiscal and monetary policy stimulus actions taken to support Australia during the global downturn would need to be removed.

“In due course, both fiscal and monetary support will need to be unwound as private demand increases,” he said.

“In the case of fiscal measures, this was built into their design.

“The peak effect of these measures on the rate of growth of demand has probably peaked.

“The extent of support will tend to tail off further over the next year.”

“In the case of monetary policy, the bank has already signalled that interest rates can be expected, at some point, to move off their currently unusually low levels, as recovery proceeds,” Mr Stevens told the committee hearing in Sydney.
He said adjustments back toward “more normal settings” - for both types of macro-economic policy - should be expected during the recovery phase of a business cycle.

“Our most recently released set of forecasts assumes they occur,” Mr Stevens added.

“Such an outcome would mean that fiscal and monetary policy would be acting broadly consistently, as they did when they were moved in the expansionary direction when the economy was slowing.”

However, a degree of policy discipline will be needed.

“On the fiscal side, the forward estimates provide an indication of the restraint needed to move the budget back towards balance and eventual surplus over time, as required by the government’s medium term fiscal commitment,” Mr Stevens said.

“On the monetary side, the inflation targeting framework the Reserve Bank has been following for a decade and a half will guide adjustments to interest rates.”

AAP