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Gillard set to pressure RBA on rates

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Prime Minister Julia Gillard is set to become the latest in a long line of political and business leaders to pressure the Reserve Bank of Australia (RBA) to reduce interest rates.

In a speech to business leaders in Perth later today she will link her budget ­surplus goal directly to lower interest rates, saying the RBA has “plenty of room” to cut the cash rate, according to a pre-released speech.

The government has projected a surplus of about $1.5 billion in the next financial year.

“In the current economic environment, should the RBA consider it appropriate to change the cash rate, this could deliver widespread benefits for households and business, noting that a number of sectors of the economy most under strain are arguably more sensitive to interest rates,” Gillard will argue.

“This is fully consistent with the Reserve Bank’s charter obligations to best contribute to economic prosperity and full employment, as well as containing inflation.”

But ANU economist professor Shaun Vahey says the RBA should have an “interest rate path” that sets out the expected rate at various future dates – like the open market committee of the US Federal Reserve does – in order to reduce the impact of populist calls for rate cuts to what is supposed to be a decision-making body free from political interference or pressure.

“We are currently seeing in Australian circumstances in which short-term perspectives lead some to argue that policy should be substantially ‘looser’,” Vahey said, according to AFR.

But Liberal senator Arthur Sinodinos said the government was creating an atmosphere of political pressure on the RBA to cut rates “faster and harder” than it might otherwise.

“They shouldn’t be conned by the prime minister into thinking that she is going to deliver such a razzle dazzle budget until they’ve actually seen it,” Sinodinos told ABC Radio.

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