Australia Has More Scope for Rate Cuts, Former RBA Chief Says

By Jacob Greber

Dec. 3 (Bloomberg) -- Australia has room to lower interest rates further and increase government spending to support the economy amid the current global crisis, former central bank Governor Ian Macfarlane said.

Reserve Bank of Australia Governor Glenn Stevens, Macfarlane’s successor, cut borrowing costs by 1 percentage point yesterday to a six-year low of 4.25 percent, extending the biggest round of reductions since 1991. While economic growth last quarter was the slowest in eight years, Australia has so far avoided a recession, unlike the U.S., U.K., Europe and Japan.

“We have scope to move both monetary and fiscal policy in an expansionary direction,” MacFarlane told a gathering of the Lowy Institute for International Policy in Sydney today. “Australia is better placed than any other Organization for Economic Cooperation and Development country I can think of.”

Australia’s government has posted budget surpluses for most of the decade and the central bank’s key overnight cash rate is more than four times higher than the U.S. Federal Reserve’s benchmark rate, and 100 basis points higher than the European Central Bank’s 3.25 percent key rate. To buttress the economy, Prime Minister Kevin Rudd said last week he may allow the government’s budget to slip into deficit.

Macfarlane, the head of central bank between 1996 and 2006, said while the global credit crunch means there is a need for tougher rules, there is “no point in moving to a tougher regulatory regime until we get the present mess sorted out.”

‘Immediate Need’

“The immediate need is to get credit flowing again,” said Macfarlane, who is an adviser to Goldman Sachs Group Inc. “We must return to a situation where lenders will be prepared to take the normal commercial risks, without which no economy can function.”

From an international perspective, Macfarlane said the current situation is more serious than the dot-com bubble, the 1998 Long Term Capital Management hedge fund bailout, the Asian financial meltdown a decade ago, the mergers-and-acquisition bubble of the late 1980s, the 1987 share market collapse, the 1980s U.S. savings and loan crisis, and the so-called third world debt crunch of the early 1980s.

“We have never seen such a freezing up of lending between the banks before, and we have never seen a situation where in the U.S., the U.K. and Europe, so many banks and other financial institutions have had to be fully or partially nationalized in order to prevent their collapse,” he said.

Macfarlane said the crisis has also “invalidated” the model of a deregulated financial system that has operated in recent decades by transmitting instability among banks to the wider economy.

U.S. Tarnished

“It has failed the market test: it has lost its owners, that is shareholders, vast amounts of money,” Macfarlane said. “It has also greatly reduced the moral authority of the U.S. in international financial affairs.”

Stevens, who lowered borrowing costs by three percentage points since September, said yesterday that monetary policy is now “expansionary” to help restore consumer and business confidence amid a 44 percent plunge in the benchmark S&P/ASX 200 stock index and the biggest decline in home prices since 1978.

For Australia, the global turmoil has been less serious, Macfarlane said. “Our banks remain well-capitalized, profitable and not exposed to subprime mortgages locally or in the U.S.,” he said.

“Mortgage arrears in Australia are miniscule by world standards and most of the corporate sector is moderately geared,” the former governor said. “If we had to make a judgment on whether our system was fundamentally unstable, we would have to say we see no evidence to suggest it.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net