Australia still has room to cut rates - central bank governor

Australia still has room to cut rates - central bank governor
Business & Markets 2013
Written by Reuters
Tuesday, 30 July 2013 11:51

SYDNEY (July 30): Australia's top central banker reiterated on Tuesday that inflation would be no bar to a cut in interest rates if needed to support the economy, while highlighting the challenges ahead as a long boom in mining investment came to an end.

In a speech titled "Economic Policy after the Booms", Reserve Bank of Australia (RBA) Governor Glenn Stevens also welcomed the recent decline in the local dollar and said a further fall would not "surprise".

"We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand," Stevens told a charity lunch. "The recent inflation data do not appear to have shifted that assessment."

Consumer prices data out last week showed underlying inflation ran around 2.4 percent in the second quarter, well within the RBA's long-term target band of 2 to 3 percent.

Those figures had fanned speculation the RBA will cut interest rates another quarter point at its policy meeting on Aug. 6, taking them to a record low of 2.5 percent.

Subdued domestic demand, a slowly rising unemployment rate and a benign inflation background all underline the case for further stimulus.

Indeed, a surprisingly weak report on approvals to build new homes published earlier on Tuesday only added to the pressure for an easing - one reason markets are pricing in a three-in-four chance of a move next week.

Stevens played down concerns that rising home or asset prices might stand in the way of a cut, saying that low rates were intended to nudge investors toward taking slightly more risk.

"There are clearly signs of policy working in this respect, though not, to date, by so much that we see a serious impediment to further easing, were that to be appropriate from an overall macroeconomic point of view," he said.

The central bank last cut rates in May, aiming to enliven sectors such as consumer spending and home building. Consumption had been unusually subdued as households chose to boost their savings in the wake of the global financial crisis.

Finding new drivers of growth was crucial as mining investment had peaked after rising strongly for some years.

"That big rise is now over, and a fall is in prospect, with uncertain timing. It could be quite a big fall in due course," said Stevens, adding that this sea-change was likely to drag on overall economic growth over time.

Partially offsetting that drag would be the increased output from all the mining investment. Shipments of iron ore were already growing by around 15 percent a year, while exports of liquefied natural gas were set to expand strongly from 2015.

Even if the pace of growth in global demand eased, the level of demand would remain structurally much higher than in the past.

"Let's be clear that Australians will continue to benefit from the higher level of resources output for a very long time," said Stevens.

A helpful factor, he added, would be a lower Australian dollar. The currency has fallen around 13 percent against its U.S. counterpart since April, a windfall to local miners.

"The recent decline in the exchange rate seems to make sense from a macroeconomic perspective," he said. "It would not be a major surprise if a further decline occurred over time."