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As jobless numbers climb, RBA is perilously close to a rare mistake; History is replete with examples of overconfident central bankers starting their austerity cycles too soon
Topic Started: 13 Aug 2014, 09:37 AM (246 Views)
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As jobless numbers climb, RBA is perilously close to a rare mistake

August 12, 2014 - 7:53PM
William Pesek

A jobless rate in Australia that surpasses the US level may not seem like a problem for US Federal Reserve chair Janet Yellen and European Central Bank president Mario Draghi. But it may be a sign of the overconfidence that affects central bankers everywhere.

Folks in "The Lucky Country" have long been blessed with top-notch monetary policymakers. There has been no recession on the watch of Reserve Bank of Australia governor Glenn Stevens or under his predecessor, Ian Macfarlane, who served from 1996 to 2006.

Stevens, though, is perilously close to making the kind of policy mistake that's been so rare at the RBA.

On August 5, he opted against cutting interest rates for a 12th consecutive month. Two days later, the jobless rate rose to 6.4 per cent, the highest since 2002, compared with 6.2 per cent in the United States.

There are ample examples around the world of central banks that tilted toward restraint even as deflation was a greater risk than inflation.

At the Reserve Bank of New Zealand, governor Graeme Wheeler increased rates four times between March and July and has since paused amid concerns he might have gone too far.

In Australia, Prime Minister Tony Abbott's austerity push seems at odds with global trends, and with the experience of many Australian households and businesses.

As China's demand for Australia's iron ore and coal cools, the economy may quickly find itself in need of a lift. The bad news from China may also be affecting Australian consumer confidence, which in May fell to the lowest since August 2011.

As I have written, Abbott needs to be diversifying the economy toward growth engines that rely less on China.

That means increased investments in infrastructure, education and training to increase competitiveness.

Yet Abbott and Treasurer Joe Hockey are moving in the other direction, showing excessive concern about a rather modest budget deficit. The drag from Abbott's fiscal priorities puts the onus on the central bank.

Stevens and his team are best placed to offer support in the short run. Yet the RBA's optimism may be misplaced as China slows and Australia's economic luck runs out.

Raghuram Rajan, the highly-respected Reserve Bank of India governor, worries the next crisis will be the result of monetary excesses in developed nations creating bubbles in emerging ones.

Rajan sounded the alarm about the 2008 financial crisis as early as 2005.

For better or worse, though, central bankers are the only ones doing anything to maintain growth these days. With fiscal policy makers constrained by pro-austerity forces from Washington to Canberra, the onus is on Stevens and his peers to continue the fight against downside risks.

Modern history is replete with examples of overconfident central bankers starting their austerity cycles too soon. This may be one of those times.

Read more: http://www.smh.com.au/business/the-economy/as-jobless-numbers-climb-rba-is-perilously-close-to-a-rare-mistake-20140812-103anu.html
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