 Will the economy behave in line with the RBA's predictions?
There are risks on both sides of the interest rate outlook. That is the essence of the message given by Philip Lowe, Reserve Bank of Australia assistant governor on a speech in Sydney last Thursday.
Since the release of the RBA's quarterly monetary policy statement, expectations on interest rates are moved by the crisis enfold in Greece's debt. Obviously, the problems that Greece and other European nations confront are impending disadvantage for the international economy. However, these risks emerge to be the key basis for the local market's surge in optimism about interest rates.
"Despite the recent announcements having stabilized confidence in Europe, concerns about public finances could build again," Dr Lowe said.
Dr Lowe's speech is full of reminders of risks in the other direction. The rise in national income from growing export prices will enliven Australia’s spending power despite that the country is still recovering from the 2008 crisis.
If the expected boost in saving does not take place, the demand in the economy could be stronger than what’s predicted and will put more pressure on the capacity of the country to build supply, Dr. Lowe said.
If the economy behaves aligned with the RBA's predictions, pressure will materialize in the long run, Dr. Lowe added. However, whether the government and the private sector take action to build supply capacity remains to be seen.
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