Reserve Bank governor Glenn Stevens: rate cut 'on the table' but not automatic
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Version 0 of 1. An interest rate cut is possible, but evidence of further economic weakness will not automatically trigger one, the governor of the Reserve Bank, Glenn Stevens, warns. A period of somewhat disappointing, but hardly disastrous, economic growth and well-contained inflation has allowed the interest rate to be cut to very low levels, Stevens said at the annual Anika Foundation lunch in Sydney on Wednesday. “The question of whether they might be reduced further remains, as I have said before, on the table,” he said. “But in answering that question it is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved.” Figures released on Wednesday showed an increase in petrol prices has led to a rise in inflation, but not to levels that would prevent a rate cut by the RBA. Monetary policy works, partly, by encouraging people to take risks, Stevens said. But typically that is seen first in financial risk-taking – such as borrowing to invest in assets such as shares or existing property rather than the expansion of new businesses and job-creation. Related: RBA's warning to the government: we can't lift the economy alone And “beyond a certain point, it can be dangerous”. Even after the event, it can be hard to judge whether the policies have done too much. Policy settings that produced strong household borrowing growth leading up to 2006 would now be judged to have gone too far. “That is not the case at present, given the current rates of credit growth and so on,” he said. Future decisions would have to consider whether the economic growth they fostered was sustainable. They would also be based on the economy’s prospects, about which Stevens was pointedly upbeat: “Despite the doom and gloom and fulminations over the airwaves, in newspapers and in cyberspace, business confidence has risen in recent months.” As he had prepared his speech, news emerged that personal insolvencies were at their lowest level for a decade and income inequality in Australia had not increased, despite claims to the contrary. “Perhaps we might be allowed to conclude that we have been meeting some of our challenges, thus far, with outcomes that, while not perfect, are not too bad,” Stevens said. Australia’s future prosperity would depend on raising the economy’s growth potential, something that is neither “just some esoteric concern for economists” nor a matter of “growth at any price”. “Our collective ability to deliver social policy outcomes, to enjoy the benefits of a good society, or at a more basic level to provide public services and even to defend ourselves, ultimately rests on a productive economy,” he said. Related: Reserve Bank of Australia leaves interest rates unchanged at 2% And talk of economic reform should be presented as a positive narrative for economic growth. “We all know that competitive markets, investment in education, skills and infrastructure, and adaptability, are key parts of that growth narrative.” Official data on Wednesday showed the consumer price index (CPI), the key measure of inflation, rose 0.7% in the June quarter. That took inflation to 1.5% in the year to June, weaker than economists’ expectations of a 1.7% rise, and well below the RBA’s 2% to 3% target band. Underlying inflation, which strips out the effects of volatile price movements, rose an average of 0.55% in the June quarter, for an annual rate of 2.3%. “I think basically what this CPI data shows is that inflation remains well contained,” a senior economist at St George, Jo Horton, said. “It shouldn’t force the RBA’s hand either way ... At this stage we’re expecting the RBA to leave rates on hold for an extended period.” Petrol prices were a big factor in the result, rising 12% from the first quarter of 2015. “That has been a major factor driving overall prices higher,” she said. A CommSec economist, Savanth Sebastian, said it was unlikely petrol would have such a big impact on the next quarterly numbers. “I think the next result the fuel lift is going to be a lot less given the pressure on the oil price; to some degree that will wind down,” Sebastian said. He also expects the inflation data will not prompt any rate move by the RBA. |