Wednesday, November 25, 2015

RBA governor Stevens “happened to agree with” the reasons for holding rate steady

FXStreet (Mumbai) - Reserve Bank governor Glenn Stevens yesterday signalled that interest rates will stay on hold at the central bank’s meeting on 2nd December. He said he agreed with the reasons for leaving the rates steady. While taking a decision on rate cuts, he said he will be ‘guided by what was effective.’ Steven noted the business cycle will continue and also predicted economic downturns from time to time.

RBA can lower rates further if it really helps

Stevens had to respond to the question why the central bank had not slashed rates again even though the economy was not growing as expected and inflation was low. The banks did not slash rates probably because it thought the economy was picking up. It is also possible that the bank refrained from slashing rates further as it thought it would hurt the incomes of retirees who lived off interest.

“How to make growth better?” is what Governor Stevens asks. He admitted on way to stimulate growth is by lowering rates. He said he would be “content” to lower rates further if it really helped. He however questions whether cutting rates is the best solution that the economy can come up with at any particular time. He has warned that cutting rates now would not yeild the kind of benefits that it used to provide to stimulate the economy when rates were cut from very high levels in the 1990s.

He also believes in considering an alternative method to boost growth. “…may be that you can make it better most effectively by articulating a case for stability, playing to the positive things that are happening, not smashing the savers over the head further, if the relative effect of that stimulating is not as great as it used to be”, he said.

Business economists surveyed at the conference expect the central bank to leave its cash rate steady at 2 per cent in 2016 and lift it only when economy picks up in 2017.

Growth will pick up when effect of decline in mining investment ebbs

The central bank lowered its forecast for inflation a little. It was noted that the effects of a decline in the exchange rate are taking a little longer that expected to be impactful. Also, slow wage growth domestic costs to pick up slowly. Steven admitted that it is difficult for a central bank alone to create inflation, when other powerful forces are at work.

Governor Stevens is of the opinion that as the impact of the decline in mining investment begins to wear out, and the effects of assumed low levels of interest rates and the exchange rate continue to increase, growth will likely pick up.

Business surveys have indicated that firms believe conditions to be above their long-term average in some key sectors. Firms have also stepped up their hiring. Job vacancies have been increasing; so has labour force participation. Unemployment rate has held stable. Steven feels that these factors have supported the income growth while the effects of the terms of trade decline wore itself out.
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