© Tony Makin
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The Australian economy fared reasonably well during the 2008-2009 global financial crisis, primarily because the Reserve Bank quickly lowered interest rates and allowed a massive exchange rate depreciation, which shielded the economy from falling commodity prices. Since then however, the economy has failed to perform as expected, recording below trend economic growth. This has reflected an historically high exchange rate, in part due to higher government spending and sizeable budget deficits. Consumer spending and private investment outside of the booming mining sector has also been subdued in light of policy uncertainties.
Do you expect Glenn Stevens, the Reserve Bank of Australia Governor, to extend interest rate cut in the upcoming months?
Given that Australia's inflation rate is running slightly below the 2-3% target range, its exchange rate remains overvalued, and its interest rates remain above rates prevailing in most other advanced economies, a further cut in the official interest rate is over 50 % likely at this juncture.
Do you think that the incentive suggested by Prime Minister Julia Gillard, namely bringing the budget back to surplus, will stimulate the economy growth? What other actions might foster expansion?
The objective of returning the budget to surplus could take some of the underlying pressure off interest rates and the exchange rate. However, more economic reform is necessary to improve Australia's poor productivity via supply side initiatives, including labour market deregulation and tax reform.