SYDNEY—Reserve Bank of Australia Governor Philip Lowe on Friday said the central bank was becoming increasingly uneasy about the potential for inflation to jump in the U.S., fanned by the country’s “problematic” fiscal expansion.
“I am less relaxed. It is highly unusual to have such stimulatory fiscal policy when the economy is already operating at a very high level of capacity,” Mr. Lowe said in testimony before parliament.
“One can’t rule out the possibility that the Federal Reserve will have to withdraw monetary accommodation more quickly than currently projected, with possible disruptive consequences in financial markets,” he warned.
Markets are not prepared for a repricing of Fed intentions, but the “probability of it happening is rising,” Mr. Lowe said.
“With the U.S. economy doing well, and very low unemployment, it is the time of the cycle that should be back to budget balance…building insurance,” Mr. Lowe said while pointing out that the U.S. was doing exactly the opposite.
The U.S. is planning to run budget deficits between 4-5% of GDP into the foreseeable future and added that U.S. public debt was already high.
Mr. Lowe also expressed concern that a trend toward fiscal expansion was spreading among major economies.
“We are also seeing a similar trend emerge in other countries, where governments, responding to the disillusionment in the electorate, and the international tax competition coming from the U.S., are feeling they have to respond,” Mr. Lowe said.
Among OECD economies, more than half are having a fiscal expansion this year at a time when the world economy is doing well and unemployment rates are low and levels of public debt are very high, he added.
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