Fed: Economic gurus clash on inflation outlook

AAP General News (Australia)
12-08-2003
Fed: Economic gurus clash on inflation outlook

By Krista Hughes, Economics Correspondent

CANBERRA, Dec 8 AAP - A clash between Australia's top two economic gurus on the direction
of inflation could mean a $90-a-month difference for mortgage repayments, economists said
today.

Treasurer Peter Costello and Reserve Bank governor Ian Macfarlane agreed the economy
was in fine form, separately upgrading their expectations for economic growth in the next
two years.

But the central bank and Treasury disagreed on forecasts for inflation, the official
interest rate trigger.

In his twice-yearly testimony to a parliamentary committee, Mr Macfarlane said inflation
would dip below two per cent by mid-2004, as economic growth hit as high as 4.5 per cent.

But inflation would rise to 2.5 per cent by mid-2005 and then come under upwards pressure.

In the mid-year Budget review, Treasury forecast inflation to average just two per
cent in 2004-05.

Mr Costello played down the future risk to inflation, although he acknowledged the
higher Aussie dollar helped keep the lid on price rises.

"Even when you take out the exchange rate factor, I do not believe that you are seeing
the emergence of inflationary pressures in the Australian economy," he said.

Access Economics director Chris Richardson said the gap between the forecasts could
translate into a 0.75 percentage point difference in interest rates.

That would mean a $90 a month difference in repayments on the average $190,000 mortgage.

Macquarie Bank analyst Brian Redican said the RBA had an incentive to talk up the risks
to inflation to justify higher interest rates.

"Treasury has been consistently more concerned about the downside risks to the growth
outlook," he said.

"If it believed there was less need for (higher rates) at the present time, then it
would make sense to downplay the inflationary pressures."

Mr Costello upgraded Budget forecasts for 2003-04, pushing the expected surplus up
to $4.6 billion - from $2.2 billion - on the back of stronger than expected growth and
company taxes.

The mid-year review said the economy would expand by 3.75 per cent this year, hitting
more than four per cent as the farm sector recovered from the drought.

"The near-term outlook for the Australian economy has brightened since Budget, with
increasing signs of global recovery, particularly in the United States, and an easing
in drought conditions," Mr Costello said.

Next year's surplus was also revised up to $3.8 billion, from $1.3 billion, but economic
growth was unchanged at 3.5 per cent.

Treasury said the housing boom would last longer than expected, changing its forecast
to a three per cent rise in housing investment from a five per cent fall in May, and said
household spending would also rise.

But the higher Aussie dollar meant exports would be a bigger drag on growth than expected.

Mr Macfarlane said the last few months had seen one of the sharpest economic turnarounds
in living memory.

The improvement in the outlook meant there was no need to leave interest rates on hold
at low levels, and justified the two recent rate hikes to 5.25 per cent.

"Interest rates were just too low for an economy that was growing that well," Mr Macfarlane said.

But he said estimates of the normal cash rate being between 5.5 and six per cent -
which are behind market expectations of another rate rise next year - were just a general
indication.

AAP kmh/sb/tma/jlw

KEYWORD: ECONOMY NIGHTLEAD (PIX AVAILABLE)

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