Stevens tips rate rise as economy lifts

Reserve Bank of Australia Governor Glenn Stevens says Australia's medium-term prospects are good as the economy emerges from the global economic downturn, and has again signalled that interest rates will rise.

"I have maintained throughout that Australia's medium-term prospects remained good and that we should not lose confidence," Stevens told the Senate Economics References Committee in Sydney yesterday.

"More people seem to be taking that same view.

"Measures of business and household confidence have shown a very substantial pick-up from the low points reached earlier this year."

Stevens told the committee, which is inquiring into the federal Government's fiscal stimulus measures, that by the standards of previous downturns, this had been "mild".

"Although the evidence is as yet incomplete, this episode has been much less serious than those in the mid-1970s, the early 1980s and the early 1990s," he said.

"It has also been very mild indeed in comparison with recent outcomes in many other countries, where deep recessions have been experienced.

"It is reasonable to conclude, against the benchmarks of historical and international experience, that Australia has done quite well on this occasion."

Stevens said the federal Government's fiscal stimulus measures had materially supported demand in the economy.

"If the intention was to support demand in a period where we had a very serious global downturn, in which all indications were that it was going to affect Australia significantly, my conclusion would be those measures have supported demand, quite considerably, over the last - it is now September - probably for about the last nine or 10 months," he said.

Stevens reiterated that the fiscal and monetary policy stimulus actions taken to support Australia during the global downturn would need to be removed.

"In due course, both fiscal and monetary support will need to be unwound as private demand increases," he said.

"In the case of fiscal measures, this was built into their design.

"The peak effect of these measures on the rate of growth of demand has probably peaked.

"The extent of support will tend to tail off further over the next year.

"In the case of monetary policy, the bank has already signalled that interest rates can be expected, at some point, to move off their currently unusually low levels, as recovery proceeds."

He said adjustments back toward "more normal settings" - for both types of macro-economic policy - should be expected during the recovery phase of a business cycle.

"Our most recently released set of forecasts assumes they occur," Stevens said.

"Such an outcome would mean that fiscal and monetary policy would be acting broadly consistently, as they did when they were moved in the expansionary direction when the economy was slowing."

However, a degree of policy discipline would be needed.

"On the fiscal side, the forward estimates provide an indication of the restraint needed to move the budget back towards balance and eventual surplus over time, as required by the Government's medium-term fiscal commitment," Stevens said.

"On the monetary side, the inflation-targeting framework the Reserve Bank has been following for a decade and a half will guide adjustments to interest rates."

Stevens said monetary policy had to respond appropriately to the economic circumstances and it was not clear if interest rates would rise before employment peaked.

"What interest rates should do is respond to the outlook for the economy and inflation in a timely fashion.

"Whether that turns out to mean that they start to rise before unemployment stops rising remains to be seen."

Stevens said unemployment was unlikely to reach the sort of peak levels that were expected earlier in the year.

"If it peaks at six-point-something, I don't want to sound callous in the way I say this, but that's a pretty low peak in comparison with others we've seen," he said.

- AAP