Writing in The Sydney Morning Herald and The Age, BIS general manager Agustin Carstens said the current combination of high inflation coupled with historically high debt levels is.
He said low interest rates and government spending had for too long supported the global economy. That had to change, arguing major economic reforms had to be adopted.
“For too long, fiscal and monetary policy have been the go-to economic fix, resulting in debt-fuelled growth. These have now run out of road,” he wrote.
“Only structural reforms can reignite the drivers of long-term growth, including promoting competition, investing in public infrastructure and education and training for the digital age, and ensuring a sustainable and sustainable energy mix. As central banks grip the steering wheel and change course, other policymakers need to map out the route for the journey ahead.”
On Sunday, Treasurer Jim Chalmers revealed the budget’s inflation forecasts would be pushed much higher when he hands down an update on the budget in late July
Chalmers, speaking on the ABC’s Insiders program, said the 7 per cent prediction by the Reserve Bank would not be “wildly off the mark”.
“Inflation will be significantly higher than what was expected in the last government’s most recent budget, what was expected at election time as well. Certainly higher than the 5.1 per cent we saw in the March quarter. This inflation problem will get more difficult,” he said.
The BIS said as central banks lifted interest rates, those countries where most home buyers had floating mortgage rates would be most at risk of “strains”. It noted Australia, where close to 80 per cent of people over the past six years had taken out at least partial variable-rate mortgages, was one of the nations most exposed to higher rates.
“The aggregate savings built up early in the pandemic could provide buffers for households and firms to cope with higher rates, at least initially. However, the incidence of higher savings may not match that of debt burdens,” it said.
The bank also raised doubts over a key assumption held by both the federal Treasury and the Reserve Bank as to how the Australian government will pay down its record gross debt of $892 billion.
Both have argued that as long as the economy grows faster than interest rates, overall debt and the interest bill on that debt will fall as a proportion of GDP. Then-treasurer Josh Frydenberg made the argument as recently as March.
Carstens said there was now a real risk interest rates could be higher than economic growth.
“As monetary policy tightens, tensions with fiscal policy will emerge. As monetary normalisation gathers pace, growth rates will probably be closer to or even below interest rates,” he said.
Analysis by Macroeconomics Advisory chief economist Stephen Anthony earlier this year found if interest rates out-paced growth, the federal budget deficit could reach $124 billion by 2032-33. Net debt, expected to be $714 billion this year, would reach $1.7 billion the same year.
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