The Reserve Bank of Australia may need to enact sharp reductions in the cash rate if the currency does not depreciate in tandem with a fall in commodity prices, the Organisation for Economic Co-operation and Development (OECD) said in a report on Friday.
"A lower sensitivity of the currency to falling commodity prices might require stronger cuts in the cash rate to support demand," the Paris-based think-tank said in the Economic Survey of Australia.
According to OECD, monetary conditions currently seem to be appropriate, but the RBA should be prepared for further loosening if the international environment deteriorates, even if this postpones the return to budgetary surplus. The RBA has reduced cash rate by a cumulative 175 basis points since November last year.
"The conduct of monetary policy needs to cope with the conflicting pressures on the currency," the report said.
Releasing the survey, OECD Secretary-General Angel Gurría said the strong Australian dollar resulting from the mining boom is imposing considerable structural changes on the economy.
OECD expects Australia's gross domestic product to grow 3.75 percent in 2012 and by about 3 percent over the 2013-14 period.
Australia is in a good position to respond to risks. The main challenge for policy is managing a sustained recovery, while promoting important structural changes in the economy, the report pointed out.
OECD said this is an opportune time for fiscal consolidation. "A low unemployment rate, growth prospects close to potential and still-high terms of trade constitute favourable conditions for restoring fiscal space," it noted.
by RTT Staff Writer
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