Writing for The Sydney Morning Herald and The Age, BIS CEO Agustín Carstens said the current combination of high inflation along with historically high debt levels is unprecedented.
He said low interest rates and government spending had supported the global economy for too long. That had to change, arguing that major economic reforms had to be adopted.
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“For too long, fiscal and monetary policy has been the preferred economic solution, leading to debt-driven growth. Now they have run out of way,” he wrote.
“Only structural reforms can reactivate the engines of long-term growth, including the promotion of competition, investment in public infrastructure and education and training for the digital age and the guarantee of a lasting energy combination and As central banks get behind the wheel and change course, other policymakers need to chart the route for the journey ahead. “
On Sunday, Treasurer Jim Chalmers revealed that budget inflation forecasts would increase much more when he sends a budget update in late July.
Chalmers, speaking on ABC’s Insiders program, said the Reserve Bank’s 7% forecast would not be “perfect.”
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“Inflation will be significantly higher than expected in the last budget of the last government, which was also expected in election time. Definitely higher than the 5.1 percent we saw in the March quarter. This inflation problem will become more difficult, ”he said.
The BIS said that as central banks raised interest rates, those countries where most homebuyers had floating mortgage rates would be more at risk of “tension”. He noted Australia, where about 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 the highest rates.
“The aggregate savings accumulated at the beginning of the pandemic could provide buffers for households and businesses to cope with higher rates, at least initially. However, the incidence of higher savings may not match that of debt burdens. “, he said.
The bank also raised doubts about a key hypothesis for both the federal Treasury and the Reserve Bank about how the Australian government will pay off its record gross debt of $ 892 billion.
When former treasurer Josh Frydenberg delivered the March 29 budget, a key hypothesis was that the economy would grow faster than interest rates, but the BIS warns that it may not be right. Credit: Getty
Both have argued that as the economy grows faster than interest rates, global debt and the interest bill on this debt will fall as a proportion of GDP. Then-Treasurer Josh Frydenberg made the argument in March.
Carstens said there was now a real risk that interest rates could be higher than economic growth.
“As monetary policy tightens, tensions will arise with fiscal policy. As monetary normalization accelerates, growth rates are likely to be closer to or even below interest rates,” he said. to say.
Macroeconomics Advisory chief economist Stephen Anthony’s analysis earlier this year found that if interest rates outpaced growth, the federal budget deficit could reach $ 124 billion by 2032-33. Net debt, which is projected to be $ 714 billion this year, would reach $ 1.7 billion the same year.
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