Govt sent clear signal for change

The Reserve Bank has sent the Government a clear and unusually public signal that it would welcome a tougher approach to fiscal policy than that foreshadowed in May's Budget.

Faster fiscal consolidation would reduce demand pressures in the economy, reducing the extent to which interest rates needed to rise and, other things being equal, contribute to a lower exchange rate, it said.

It also renewed its plea for a "more neutral" tax system that encourages people to spend less and save more, and to invest their savings in something other than housing.

Higher savings rates would be likely to lead to lower interest rates on average, it said, meaning rates would not have to be as high to have the same impact on demand.