So, who is right? Until proven otherwise, the man with the whistle calling it is the RBA boss, Glenn Stevens, and he says stimulus can stay, for the moment.
And it doesn't mean we will be inflicted with higher interest rates soon, but they will rise and it could be this year!
In fact, Macquarie’s economics team thinks we will see a rise in November and in December! CommSec’s Craig James reckons the first will come next year (this followed his close analysis of what Stevens said yesterday).
The Governor’s testimony to the Senate Economics References Committee bluntly said the central bank had no concerns over the stimulus policy.
He said interest rates will have to rise from the current emergency levels when the recovery looks more entrenched.
He also said the predicted debt of the Government will probably be smaller than expected as unemployment should be lower and that decreases forecasted deficits and therefore our future debt.
His view on debt was put this way: “I would have to say that the prospective debt that we are going to have … I think for a country like Australia ought to be seen as quite manageable”.
And he explained his attitude to interest rate rises: “What interest rates should do is respond to the outlook for the economy and inflation in a timely fashion ... whether that turns out to mean that they start to rise before unemployment stops rising remains to be seen”.
One important message he left was that he was not convinced we were totally out of the woods and so caution was needed in reducing fiscal stimulation and even raising interest rates.
“In due course, both fiscal and monetary policy support will need to be unwound as private demand increases … in the case of fiscal measures, this was built into their design.”
Stevens is a smart guy and a no-nonsense critter and he isn’t a yes man to the Government of the day. He raised interest rates when the Howard Government was about to go to an election!
He plays it as he sees it and he thinks stimulus is appropriate now. When he changes his mind he will let us all know. First, he will let Government know directly or indirectly. If they listen and react, that would be smart. If they don’t, interest rates will rise quicker than anyone in debt would like and that’s when the Rudd Government’s political fairytale will start resembling a Grimm’s fairytale possibly without the happy ending!
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