Reserve Bank governor Glenn Stevens has made the case of a cut to the official cash rate as early as next month, telling the international business community a further easing of Australia’s monetary policy settings “has to be on the table”.
Speaking at a lunch event for the American Australian Association in New York on Monday, Stevens said “interest rates should be quite accommodative” but he said lowering interest rates would only have their desired effects on the economy if other policy measures can be used to stimulate business and consumer confidence.
While Stevens said aggregate demand in the economy “still seems on the soft side as resources investment fall sharply” and inflation is expected to remain within the bank’s target, he said the high level of household debt in Australia is a complicating factor.
“The extent to which further increases in leverage should be encouraged is not easily answered, but nor can it be conveniently side-stepped,” he said.
Stevens said the federal government has “little choice but to accept the slower path of deficit reduction over the near term” but over the long term “hard thinking still needs to occur about the persistent gap we are likely to see (under current policy settings) between the government’s permanent income via taxes and its permanent spending on the provision of goods and services”.
And while Stevens said the RBA board has “signalled a willingness” to cut official rates further, he made it clear this should only happen if a further rate cut would “be helpful in securing sustainable economic growth”.
“The board has been proceeding with a degree of caution that is appropriate in the circumstances,” Stevens said.
“It also has, I would say, a realistic assessment of how much monetary policy can be expected to achieve in supporting the adjustment the economy needs to make.”
“Any help in boosting sustainable growth from other policies would, of course, be welcome. In particular, things that could credibly be seen as lifting prospects for future income, and increasing confidence in those prospects, would give monetary policy a good deal more traction.”
But Stephen Koukoulas, managing director of Market Economics and economic adviser to Dun & Bradstreet, told SmartCompany this morning the RBA “should have cut rates months ago” and has been “dragging the chain”.
Koukoulas says it appears from Stevens’ speech yesterday, the RBA has begun to realise there is “more to the question” than Sydney’s hot property market, which has been quite obvious to others for some time.
“But having said that, we’ve had a curious run of generally better news,” Koukoulas says, referring to recent data releases on job numbers, retail sales and housing starts, which are “nice and strong”.
“In a funny way, the conversation about weakness has come a bit late,” he says.
“We’ve had better news out of the euro zone, the US is looking OK – not perfect – but OK, so of course rate cuts are on the table and they will be for some time.”
Paul Bloxham, chief economist at HSBC, told SmartCompany much of what Stevens spoke about yesterday was “saying that monetary policy is getting towards the end of its ability to drive sustainable growth in the economy” and the other levers in the economy need to start working.
“Part of what he was saying is the budget is very important this year and the government needs to be very careful about how it approaches the budget as it was fairly clear last year’s budget did some damage to confidence,” Bloxham says.
Bloxham says it is unusual for the governor of the Reserve Bank to comment on fiscal policy but Stevens pointed out in his speech that the government should use its policy settings to “absorb” the losses of falling commodity prices, rather than leaving that to monetary policy setting.
“It was a clear signal and that suggests he is confident that’s what the government is likely to do,” Bloxham says.
“And we think it is the right strategy. There is no point one arm of government scrambling to lift growth if the other arm is seeking to tighten conditions.”
Koukoulas believes it has also been evident for “four or five years” that the successive federal governments will have to take a slower approach to reducing the budget deficit as commodity prices, particularly the price for iron ore, continues to fall.
“Each time we reframe the budget,” he says.
“We must be getting close to the bottom of the price cycle for iron ore. We’re seeing smaller miners closing down or scaling back so maybe the market is working, we are lowering output.”
Bloxham says it is important to remember Stevens’ speech was designed for its audience – “a set of New York investors – and sought to relay information about what is happening in Australia to the international business community.
But Koukoulas says there are some encouraging signs in the economy for SMEs, who should be benefiting from already low interest rates and may be seeing some wealth effects from recent gains on the stock market.
However, he says consumer sentiment remains “miserable”.
“We need the consumer to come back,” Koukoulas says.