Treasurer Wayne Swan overruled the Reserve Bank governor in a bid to use Bank profits to prop up the federal budget, a parliamentary inquiry has been told.Governor Glenn Stevens told the inquiry he asked Mr Swan in writing last year to direct all of the Bank’s $1 billion 2011-12 profit to its critically short reserve fund, needed to absorb changes in the value of the banks foreign currency holdings.
Normally worth around $6 billion, the fund had dwindled to $2 billion.
“It’s a key part of our capital. It has been depleted considerably by the effects of the rising exchange rate,” Mr Stevens told the inquiry. “I believe the prudent and best course is to rebuild it as quickly as we can but I am not subject to the other pressures that the government is.”
Mr Stevens wrote to Mr Swan who denied the request and insisted on taking half of the profit as a dividend to help achieve a budget surplus in 2012-13, leaving around $500 million to bolster the fund.
“In the end it was his prerogative,” Mr Stevens said. “He was perfectly entitled to do it under the Act. He made a judgement, and I had to accept that judgement.”
Mr Stevens told the inquiry the next move in interest rates was far more likely to be down than up, but said he wasn’t in a hurry.
“There is a good deal of interest rate stimulus in the pipeline. It is having an effect. Housing prices have been rising since last May. Share prices have also risen quite significantly, and if anything by a little more than in comparable markets overseas. These are channels of monetary policy at work.”
Mr Stevens believed the Australian dollar was too high at around 103 US cents, but had no intention of intervening to bring it down...
“My sense is the dollar is somewhat too high, but we are not talking fifty per cent or anything like that,” he said. “You would need to be pretty confident it was seriously overvalued before you would launched a large scale intervention. We haven't done that in this episode although there are other episodes where we have.”
It was entirely possible the Australian dollar would stay at its present levels for some time.
“I know that won’t sound like much comfort, but I think that’s all I can tell you,” Mr Stevens said.
The governor backed Mr Swan’s decision to walk away from his promise of a 2012-13 surplus, saying if he the treasurer had persisted with the promise he could have damaged the economy.
“I think the surplus was always going to be hard to achieve this year. I would have found it a bit more surprising for him to have gone out and do drastic things.”
“You could imagine a world where the intention to achieve a surplus led to further cuts in spending and increases in taxes in the next few months. That would would have hurt the economy. There would have been nothing we could do with interest rates to offset that in the short term. We would have ended up with a weaker economy.”
His remarks dovetailed with those of the treasurer who told an Australian Business Economists breakfast that to engage in “austerity for austerity’s sake” would be “detrimental to growth in jobs and our economy”.
“The government won’t do it. We are determined to come to a surplus at a pace that’ll be consistent with strong growth and full employment,” Mr Swan said.
Mr Stevens doubted that the prime minister’s decision to call the election early had done any economic damage, saying such claims were rarely backed by evidence. If needed he would move interest rates during the campaign without regard for the consequences as he did in 2007.
In today's Sydney Morning Herald and Age
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