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The nation’s 23 million people can be touchy about references to the yellow fruit. Many still seethe over a warning by former prime minister Paul Keating that Australia risked becoming a banana republic. His fear: the economy might become perilously reliant on exports, leaving living standards vulnerable and volatile.
Few economists harbour such fears today. Australia has been an unambiguous hero of the post-Lehman Brothers world, boasting average growth of 3 percent in recent years as the US, Europe and Japan retreat or stagnate. It’s enough to make a hedge-fund manager searching for the next Greece look elsewhere. Yet there is one developing-nation dynamic that warrants concern: The Australian government is browbeating the central bank into making decisions that may compromise stable growth. How governor Glenn Stevens responds will offer important clues about the state of central bank independence.
Australians have many valid gripes: housing prices are still too high; Chinese demand for resources is creating a two-speed economy between mining cities and others; infrastructure is crumbling; high taxes leave the nation uncompetitive; education needs an overhaul; and politics have become too toxic for change to have a shot.
Yet political pressure on the Reserve Bank of Australia (RBA) to cut interest rates won’t solve any of these problems. Instead, it may leave Australia more susceptible to the boom-bust cycles that Keating warned of years ago while serving as treasurer. Lowering rates too much takes the onus off government to do its job and hinders needed change.
That gets us back to bananas. Investors expect Stevens to preside over a rate cut when the RBA board meets in May. Trading in inflation-linked bonds suggests more moves may follow if consumer prices stay in the 2 percent to 3 percent target. Deflation is as big a threat globally as inflation.
Unlike most advanced nations, which publish inflation figures monthly, Australia’s are released quarterly. That complicates the RBA’s task. But because of the dearth of data, personal experiences at the cash register weigh heavy.
No matter what inflation really is, Prime Minister Julia Gillard should not press Stevens into acting. The idea of central bank independence is antiquated.
Although Gillard has couched most of her statements on the central bank with phrases such as “if it chooses to”, her intentions are pretty clear. “There is plenty of room for the (bank) to move further if need be,” she said last week. That leaves little doubt about her desire for a more compliant monetary strategy.
Lower rates certainly would be a short-term boon for homeowners, who are among the most indebted anywhere; 90 percent of them have variable-rate mortgages. Much of the criticism of Gillard is justifiable. So far, it isn’t clear that she can fulfill her duty to leave the nation better off than when she came into office two years ago.
But she hasn’t been a disaster. She’s no worse than her predecessor, Kevin Rudd and John Howard, before him, who were no policy dynamos.
When you consider globalisation’s biggest challenges, Australia is subject to all of them: a widening gap between rich and poor; the effects of climate change; unappealing choices posed by immigration; and waning productivity. Gillard hasn’t done much to address these impediments to the outlook.
She also feeds into the national obsession with returning to budget surpluses, pursuing a fiscal policy that would be anything but constructive in today’s world. Australia failed to create a sovereign wealth fund to help save for a rainy day.
Efforts to tax the exorbitant profits of mining companies fell flat. If China crashes, Australia will spend years explaining why it hasn’t done either.
In the meantime, the goal of achieving a budget surplus has become an ideology all its own. In a world in which credit-rating companies are downgrading the US and France, Australia has little to worry about. It shouldn’t flinch at making the investments that will leave the economy better off decades from now.
Gillard’s surplus ambitions have her leaning on Stevens to ease so she can tighten the fiscal side of the ledger. Haven’t we seen the downside of this mix before? The US is still shaking off the bubbles inflated during Fed Chairman Alan Greenspan’s tenure. Australia should think long and hard about the unintended consequences of easy money.
William Pesek is a Bloomberg View columnist. The opinions expressed are his own.