Markets: Governor's words of interest

Reserve Bank of Australia Governor Glenn Stevens came to lunch and left many in his audience hungry for more rate cuts.

He may oblige them.

“We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand,” says Stevens to an audience of financial market participants at Sydney’s Four Seasons Hotel today.

That was music to the ears of the market that is forecasting the cash rate falling to a new historic low of 2.5 per cent at the RBA’s monetary policy meeting next month, from 2.75 per cent. The Australian dollar fell soon after the Stevens remarks were available for scrutiny – to US90.83 cents from about US92 cents. The S&P/ASX200 Index, which had fallen below yesterday’s close before Stevens began speaking, rose but was largely unchanged.

If rate cut predictions needed further reinforcement, Stevens provided it. In a question and answer period after his speech, the RBA governor says he is “not concerned (the RBA) is running out of ammunition” if the central bank needs to stimulate the economy further.

Stevens in his speech says he is very concerned about business confidence. That, to some in the Four Seasons ballroom, further strengthened their perceptions the RBA will cut the cash rate further.

“It is somewhat concerning the business community’s confidence has been quite subdued in recent times,” says Stevens. “Unfortunately it is not a straightforward thing to turn sentiment around.”

Further reinforcing rate cut prejudices was Stevens squashing of the inflation spectre.

“We have been saying the inflation outlook may afford some scope to ease policy further if needed to support demand,” he says. “The recent inflation data do not appear to have shifted that assessment.”

Moreover, the 14 per cent fall in the Australian dollar since April 11 will not, in Stevens' words, “derail” the central bank’s inflation fighting stance.

Rather, the drop in the Australian dollar “is helping” Australian companies but productivity and cost performance "will also be key”.