The head of the Treasury says the Reserve Bank should be prepared to cut interest rates further as the Australian dollar falls, if necessary temporarily breaching its target and allowing inflation to climb beyond 3 per cent.Dr Martin Parkinson is a member of the Reserve Bank board. The Bank’s governor Glenn Stevens has signed an agreement with the Treasurer to keep inflation between 2 and 3 per cent “on average over the cycle”.
As the Australian dollar slid below 95 US cents for the first time in 30 months on Thursday Dr Parkinson told a Senate hearing the Bank should “look through” the inflation consequences of the sliding dollar and continue to keep interest rates low or cut them further even as the falling dollar pushed up prices.
“I wouldn’t wish to speak on the governor’s behalf and as a board member it is always a slightly difficult situation,” he said.
“But they could basically keep interest rates at a particular point, or they could lower them further, and just accept that inflation went out of the band for a period. Then, you know, they could try and stop the second round effects.”
He was backed up by his deputy David Gruen who said the Reserve Bank’s “flexible” target meant it could allow inflation to climb above the top of the 2 to 3 per cent target band so long as it did not spark a wage-price spiral. Inflation is at present 2.5 per cent. A sudden increase in rates in order to contain inflation as the dollar fell could harm the economy and prevent the dollar from falling further. It has slid from 102 US cents to 94.6 US cents in the past five weeks.
Dr Parkinson conceded that some of the assumptions that underlay the Budget forecasts were out of date when the budget was delivered on May 14 and said he took “full responsibility”...
“When we were bedding down the budget there were movements in commodity prices and we had to say, well what do we do? Do we respond to what has happened, or do we sit? We chose to sit, and I take full responsibility.”
“With hindsight I think I would have been better off jumping in the other direction, but it was an on-balance decision".
The decision means the forecasts in the Treasury’s pre-election outlook will be different to those in the budget, taking into account what will most likely be lower commodity prices and a lower dollar. The likely difference backs the Coalition's contention that it won’t be in a position to release its policy costings until after the Treasury update when the campaign is underway.
Dr Parkinson and Dr Gruen savaged reports in each of Australia’s leading newspapers suggesting that Western Australia was in a demand recession.
“The idea that in the face of the largest export boom we have ever seen you ignore exports and focus on one piece of the economy, demand and claim that that is a recession, it belongs in the comic books,” Dr Gruen said.
State final demand in Western Australia slid 1.5 per cent in the March quarter after sliding 0.7 per cent in the December quarter.
Dr Parkinson said he would would never describe either a state a national economy as being in recession “by counting quarters of negative growth.”
“In Australia it is often said the official definition of a recession is two quarters of negative growth. I don’t know who the official is,” he told the hearing.
Asked what would constitute a recession, Dr Parkinson said he did “not tend to utilise a definition”.
“I reckon a recession is something, you know it when you’ve got it,” he said.
In today's Canberra Times, Sydney Morning Herald Related: National Times
COOL QUOTE FROM PARKINSON:
"I think the whole idea of saying, you’ve got this thing called the economy which is totally interlinked and saying well today what I am interested in is ‘is there a recession in the housing sector or is their a recession in Victoria’, you may as well say ‘is there a recession in houses that are built out of red brick with tin roof, as against ‘is there a recession Ballarat as against Bendigo’."
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