Reserve Bank governor Glenn Stevens signals interest rates could go lower

http://www.theguardian.com/world/2014/jul/03/reserve-bank-governor-interest-rates-lower

Version 0 of 1.

The Reserve Bank governor, Glenn Stevens, says he still has “ammunition” on interest rates, increasing the chances that the next move in borrowing costs will be down.

The dollar dropped nearly half a cent to $US0.938 after Stevens used a speech in Tasmania on Thursday to warn investors not to assume that the currency would not fall or that house prices would continue to rise.

Stevens said the full effects of Australia's record low 2.5% cash rate were yet to be seen and would continue supporting demand for some time.

Highlighting his concerns, Australian retail spending fell for the second month in a row, as spending cuts in the federal budget dampened consumer confidence.

Retail trade was down 0.5% in May, following a 0.1% fall in April, the Australian Bureau of Statistics said on Thursday.

After toning down his rhetoric in recent months about the problems of a high dollar, Stevens’s comments will fuel the chances of the RBA moving to cut rates in order to maintain growth and curb the currency, which has pushed towards $US0.95 in recent days.

Low interest rates had been having their intended impact on the economy, Stevens said, but he suggested the RBA retained scope to cut again if it needed to.

"We still have ammunition on interest rates – we have not got close to the zero lower bound that has afflicted some other countries," he said.

Although the RBA board's language had evolved since it last cut rates in August, that did not suggest it was considering a rate rise, Stevens said.

"People may react by thinking that, if the bank is not thinking about easing, then it must be thinking about tightening. But we were not contemplating tightening," Stevens said.

"In fact, the conclusion we had reached was that we might be on the brink of sitting still for some time.

"That is why we adopted language about stability in interest rates, the intended effect of which was to be clear to people that we did not think that higher interest rates were imminent.”

He repeated the view that the exchange rate remained high by historical standards and said some trade-exposed sectors still found it "quite uncomfortable".

He acknowledged it was an unusual time, with interest rates near zero in major economies, a factor supporting the Australian dollar in recent years.

"Nonetheless, we think that investors are underestimating the likelihood of a significant fall in the Australian dollar at some point."

On housing prices, he said some recovery after falls from 2010 to 2012 was no particular cause for concern.

But he warned that in making financing and investment decisions, people should not assume that prices always rise. "They don't; sometimes they fall," he said.