RBA Says Leading Economies Need to Reduce Spending

March 26 (Bloomberg) -- The world’s largest economies, including the U.S., U.K. and Europe, face “difficult fiscal decisions” in coming years to curb debt levels, according to Australian central bank Governor Glenn Stevens, the only Group of 20 policy maker to boost borrowing costs this year.

“At some point, significant discretionary tightening will be required,” Stevens told a conference in Sydney today. Without a “credible path to fiscal sustainability” economic growth “could easily be stunted by rising risk premia built into interest rates as markets worry about long-run solvency.”

Stevens, who didn’t address domestic monetary policy in his speech, said financial market turmoil triggered by Greece’s debt levels is a “reminder of the challenges facing many governments.” By contrast, Australia’s debt-to-gross domestic product ratio is a “conspicuous exception.”

The governor also said differences in the speed of economic recoveries between regions such as Asia and advanced economies “are likely to put strains on the relative settings of macroeconomic policies and exchange rate arrangements.”

“This will need careful management, by all concerned, over the next few years,” Stevens said.

Mounting evidence that Australia’s economy, which skirted last year’s global recession, is likely to expand at or close to trend this year prompted Stevens and his Reserve Bank of Australia board to increase borrowing costs this month for the fourth time in five meetings.

Best Performer

The central bank has boosted the benchmark rate to 4 percent from 3 percent in early October, making the Australian dollar the best performing currency among the 16 most traded in the past year. The local dollar has gained 29 percent since March 2009.

The Australian dollar fell to 90.71 U.S. cents at 9:19 a.m. in Sydney from 90.78 cents just before a copy of the speech was released. The two-year government bond yield gained 2 basis points, or 0.02 percentage point, to 4.95 percent.

Traders are betting there is a 42 percent chance of a quarter-point rate increase when the central bank next meets on April 6, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 9:20 a.m. Prior to the speech, chances of a move stood at 44 percent.

‘Tissue Damage’

“It is helpful that the global financial system is gradually recovering its poise, after a near-death experience eighteen months ago,” Stevens said today. “Perhaps like a patient that has suffered an acute cardiac event, there has been some lasting tissue damage, but quick intervention avoided something much worse.”

Australia is also “more advanced in this regard,” as local policy makers have moved to end measures introduced at the height of the global financial crisis in 2008 to stabilize the domestic financial system.

“The expansion in the RBA’s balance sheet was unwound nearly a year ago and the policy rate has been increased somewhat, reflecting the very different circumstances facing the Australian economy,” the governor said.