Reserve stays focused on need for lower dollar

The Reserve Bank is keeping the door open to further interest rates cuts, but believes the "significant amount" of monetary policy easing over the past two years is already stimulating growth.
By · 19 Dec 2013
Share this article
By ·
19 Dec 2013
Share this article
comments Comments
Upsell Banner
The Reserve Bank is keeping the door open to further interest rates 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 spoke again on 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, and rose 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 over a possible tapering of the US Federal Reserve's stimulus program, which has strengthened the Australian dollar in recent years, on Thursday morning.

Mr Stevens reiterated his preference for a lower dollar, noting the exchange rate remained "uncomfortably high". He said intervening in foreign exchange markets remained an option, although the 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," 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", possibly strengthening in the medium term.

The Mid-Year Economic and Fiscal Outlook, which was released on Tuesday, revealed that the federal government expected the budget to remain in deficit over the next decade. The budget blow-out 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 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 would not rule out the use of macroprudential tools to cool the housing market. But he said he was "not entirely convinced that they are going to be the silver bullet as some think".

Mr Stevens welcomed a normalisation of 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.
Share this article
Keep on reading more articles from InvestSMART. See more articles
For more information on Sims Limited (SGM), please click here
Join the conversation...
There are comments posted so far. Join the conversation, please login or Sign up.
Related Articles