RBA keeps its focus on lower dollar
The Reserve Bank is keeping the door open to further interest rate cuts, but believes the "significant amount" of monetary policy easing over the past two years is already stimulating growth.
RBA governor Glenn Stevens said at the House of Representatives' economics committee on Wednesday that "at this point ... there are few serious claims that the cost of borrowing per se is holding back growth".
In his last public appearance before the end of the year, Mr Stevens talked again about the need for a lower exchange rate, saying an Australian dollar trading above US90¢ would not be sustainable for the economy over time.
He added that monetary policy had its limitations and while it would boost growth in the short term, other policies that boosted productivity and business investment would be more central to economic expansion in the long term.
Financial markets broadly shrugged off Mr Stevens' comments. The Australian dollar remained weak, rising slightly just before the start of his remarks in Canberra from about US89.15¢ to US89.26¢. It was buying US89.06¢ late on Wednesday.
Investors remained cautious about a possible start, on Thursday morning, to a pull-back of the US Federal Reserve's stimulus program, which has strengthened the Australian dollar in recent years.
Mr Stevens reiterated his preference for a lower dollar, noting that the exchange rate remained "uncomfortably high".
He added that intervening in foreign exchange markets remained an option for the RBA, although the central bank had not done anything "unusual" in recent times.
"I think the governor accepts the need for further stimulus in the Australian economy but he is focused on providing that stimulus through a weaker Australian dollar rather than lower rates, and I think that came out [on Wednesday]," Westpac's chief currency strategist Robert Rennie said.
Mr Stevens said Australians should not take continued economic expansion for granted. "In the end, though, firms and individuals have to have the confidence to take advantage of that situation. They have to be willing to take a risk - on a new project, a new product, a new market, a new worker. Monetary policy can't force spending to occur," Mr Stevens said.
"The path of pro-growth, pro-productivity, confidence-building reforms would mean that the basis for investment and growth in real incomes would improve."
The economy was expected to grow at a below-trend pace "for a bit longer yet", with growth possibly strengthening in the medium term.
The midyear economic and fiscal outlook, released on Tuesday, revealed that the federal government expected the budget to remain in deficit over the next decade. The budget blowout was in part due to an $8.8 billion capital injection into the RBA, which Mr Stevens said was welcomed by the central bank.
Economists said Mr Stevens' testimony suggested the Reserve Bank appeared more likely to keep the cash rate on hold at 2.5 per cent in 2014.
"The outlook for 2015 looks better, though, and we expect the bank to start returning the cash rate to a more normal level at the start of that year," Barclays' chief economist Kieran Davies said.
Mr Stevens welcomed a normalisation of the US' monetary policies, although he said the stimulus withdrawal, when it starts, would have "some disruptive effects" on other countries.
"There's not much point complaining about it. It's just the way the world works," Mr Stevens said about the start of tapering, adding that other countries had also turned to quantitative easing measures after the financial crisis.