Some words of sense yesterday from outgoing Reserve Bank governor Glenn Stevens who told our squabbling, campaigning politicians that there are years of hard budget repair work ahead for the next federal government.
In his final official appearance after 10 years as the central bank head, Mr Stevens warned that the budget faced a number of risks over the medium term.
“The budgetary situation will be okay if nothing else goes wrong, but you know you can’t really assume in life that nothing will go wrong over an extended period," he told a Trans-Tasman Business Circle boardroom briefing in Sydney yesterday.
“So I suspect that there’s quite some years of hard repair work ahead for whoever is the government over the period ahead.”
His comments dropped the value of the dollar to around 71.50 overnight.
They were in contrast to the absence of similar comments from the Federal Government and Opposition in the current very long campaign. The sinking iron ore price is driving a hole in the current budget and everyone is ignoring that.
If anything it has been the Reserve Bank and its tough monetary policy which has kept the economy on the straight and narrow in the decade of Mr Stevens’ governorship – especially its inflation target of 2% to 3% over time.
So it was natural that Mr Stevens defended the RBA’s inflation target as the best monetary policy framework in Australian history.
The central bank has forecast inflation to undershoot its target band of 2% to 3% for the next two years, leading some commentators to question whether the target is suited to the current economic environment.
But Mr Stevens said the flexible policy had helped keep the economy stable for the past 20 years.
"There’s been some commentary that we need a different target or another system, I don’t actually agree with that," Mr Stevens said. "It’s the best monetary policy framework we’ve ever had and we’ve tried most of them."
The dollar has fallen more than 5% so far in May as markets finally realised that the way they were pushing the currency towards 80 US cents was very stupid, particularly with the US Federal Reserve looking to lift rates.
Last week’s switch in tactics from the Fed, which will continue this week, means the Aussie currency will remain around current levels, or lower because markets will be factoring in one or two more rate rises this year.
Mr Stevens also had some words of caution for property investors.
He told them that property investment would never be a fail-safe get-rich scheme, saying prices would fall just as they had risen. Mr Stevens said despite the success of some investors over the years, “the assumption that there’s an easy road to riches through leveraged holdings of real estate…is not a great strategy”. He said in his time he had seen prices fall.
“In all these asset markets, a key question is always not just what the asset price is doing, but what the leverage is doing. And prices can fall; they have fallen; I think since I’ve been in this job we’ve seen them fall two or three times."
