Reserve Bank keeps rate cut option open
THE RBA could continue to cut record-low interest rates to aid the transition from mining.
RESERVE Bank of Australia governor Glenn Stevens has hinted the central bank could continue to cut already record-low interest rates, as it hopes to assist the economic transition away from mining.
Speaking at the American Chamber of Commerce in Australia, Mr Stevens said that in the US inflation is low, asset values are rising and the Federal Reserve has talked about raising “extremely low interest rates”.
However, in Australia, where inflation is also low and asset values have been rising, “interest rates are very low, and the central bank has talked about lowering them further,” he said.
Mr Stevens said that while American business and households seem to be getting more optimistic about the future, Australian counterparts were becoming less optimistic.
“It would be an interesting lunch conversation to talk about how all those facts lead to the two differing conclusions about the future,” he said.
Mr Stevens said the RBA was hoping for other sources of demand to speed up to help the economy transition away from the tail-end of the mining boom.
“It is a major transition. We can hope to assist it, and the Reserve Bank is doing that,” Mr Stevens said.
He said the RBA would continue to lend what support it could to help the economic transition, “within the limits of its powers and consistent with its mandate”.
The comments are Mr Stevens’s first since the RBA surprised financial markets earlier this month by keeping its cash rate target at 2.25 per cent. Most economists expected a quarter-percentage-point cut, adding to one in February, the bank’s first in 18 months.
The RBA’s sole policy lever is the setting of the official cash rate.
“But we have always said we cannot hope to fine-tune this transition,” Mr Stevens said.
Mr Stevens also said he did not think there was evidence that Australia’s current interest rate level of 2.25 per cent was holding back the economy.
“I don’t think personally that the current level of interest rates is the main thing holding back the economy,” he said.
“Anybody who is credit-worthy can get credit very cheaply at present. Banks are willing to lend.
“The fact that it isn’t interest rates holding things back isn’t the same things as saying that there’s no benefit from lowering them. There might be.”
Financial markets are expecting the RBA to cut rates again in May as inflation remains low and growth slows.
Still, with property prices in cities like Sydney growing strongly, lower interest rates could add to the risk of asset bubbles, which would prompt the bank to move more cautiously.
Mr Stevens was more upbeat about the Australian dollar, saying its fall over the last year has helped lift competitiveness of Australia.
He said it could fall further.
“The exchange rate is adjusting, possibly a little bit belatedly compared to what I thought at one stage likely,” Mr Stevens said.
“There has been a significant decline. This is an adjustment that is probably not yet finished in my view.”
Mr Stevens declined to nominate a target level for the Australian dollar that would make him comfortable.
Despite raising the necessity of further rate cuts, Mr Stevens was optimistic about Australia’s economic outlook. He said Australia avoided an inflationary spiral when commodity prices soared in the last decade; and as a mining-investment boom ends, he aims to avoid a “major crash”.
Australia’s economy has been hit hard by falling commodity prices in the last year, which has pushed unemployment higher. Interest rates have been cut amid scant evidence of economic recovery at the start of the year.
“If we come through this terms-of-trade event with neither a major outbreak of inflation in the upswing nor a major crash in the downswing, even if we have a period of sub-average growth in the process, we will have done far, far better than in any previous event of this kind,” Mr Stevens said.
Business Spectator, Dow Jones, AAP
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