Australia’s central bank chief set out an aggressive plan for further rate rises to curb inflation yesterday, warning against a “timid” policy as the economy sees the fastest recovery in the developed world.
Reserve Bank of Australia (RBA) Governor Glenn Stevens, who stunned markets last week with the first hike in an advanced economy since the financial crisis, said interest rates should not stay too low.
“The risks of really serious economic weakness have abated,” he told a business forum in Perth, adding “Australia has had an experience that, even if labeled a recession, was a pretty mild one.”
“That is, clearly, a good outcome in the circumstances. Now that the risks of really serious economic weakness have abated, however, the question arises as to how to configure monetary policy for the recovery,” he said.
Australia sent ripples through international markets earlier this month when it became the first G20 nation to raise interest rates since the onset of the global financial crisis.
Stevens said Australia should learn from its success in slashing rates from 7.25 percent to 3 percent, a five-decade low, before lifting them 25 basis points on Oct. 6.
That surprise decision boosted markets around the world as investors cheered Australia’s vote of confidence that the worst crisis since the Great Depression was ending.
Stevens said that the very low interest rates were based on predictions that the economy would weaken more than it did.
Gradual growth in the economy was likely to continue next year, and the bank board now had to consider the threat of rising inflation, he said.
“If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias, a very serious bias, in our monetary policy framework,” Stevens said.
Other central banks have not followed Australia in hiking rates, reflecting it had weathered the worst global downturn in decades better than other developed countries.
Stevens said Australia had headed off the worst effects of the recession with the help of low interest rates, the government’s massive stimulus spending, and economic recovery in China.
He said this did not mean the economy was currently “too strong,” only that the “downside risks to which the board was responding earlier have not materialized.”
Meanwhile, Japan’s central bank upgraded its assessment of the economy yesterday for a second month as it shows more signs of a recovery from the deepest postwar recession.
“Japan’s economy has started to pick up,” the Bank of Japan said in its monthly report in Tokyo, repeating language used in a policy statement released on Wednesday.
Bank of Japan Governor Masaaki Shirakawa said on Wednesday that signs of a rebound are spreading while economic conditions remain severe.
The central bank raised its evaluation of business investment, saying the pace of deterioration is moderating, the report showed.
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