Reserve Bank says rate cuts are working

A Reserve Bank official’s comments suggest confidence that conventional policy will work to lift Australia’s sluggish economy.

The Reserve Bank’s Christopher Kent. Picture: Hollie Adams

Australia’s record low interest rates are still strongly supporting the economy through the usual channels of a weaker currency and a falling yield curve, according to a high-ranking official at the Reserve Bank of Australia.

Chris Kent, the RBA’s assistant governor, financial markets, said the transmission of monetary policy to financial conditions is working in the usual way.

“The change in the stance of policy has underpinned the decline in risk-free rates along the yield curve,” Mr Kent told a financial markets breakfast.

The RBA cut interest rates in June and July in response to a sharp slowdown in the economy and tepid inflation. The official cash rate was cut to 1 per cent in July. The move lower has sparked debate about the effectiveness of monetary policy when rates are at ultra-low levels amid talk the central bank might soon roll out alternative policy measures.

Mr Kent’s comments suggest the RBA is confident that conventional policy will work to lift the economy, which is growing at its slowest pace in a decade, with Governor Philip Lowe saying last week he senses the economy has reached a “gentle” turning point.

The RBA is also likely to be confident that if it continues to cut the cash rate that it will have an impact, forestalling the need to adopt unconventional measures.

Cutting interest rates has contributed to a decline in the cost of funding in corporate bond markets, supported equity prices, and lowered the cost of funding for banks, including through lower rates on bank deposits, Mr Kent added.

“The decline in interest rates in Australia has contributed to the depreciation of the Australian dollar,” he said. “That broadbased easing in financial conditions in Australia will provide some additional support to demand in the period ahead.”

Dow Jones Newswires