RBA Stevens: Have More Ammunition On Rates; AUD Overvalued The Reserve Bank of Australias cash rate is well below normal levels but more cuts could be made as it is not yet close to the zero lower bound that some countries have reached, Governor Glenn Stevens said Thursday. In a speech in Hobart, Stevens said, In either nominal or real terms, the cash rate is well below normal levels, and comfortably below even the mooted lower new normal levels. Moreover, we still have ammunition on interest rates - we have not got close to the zero lower bound that has afflicted some other countries, he added. Stevens said the stance of monetary policy currently is very accommodative with the cash rate and the rate for borrowers at a 50-year low. The low interest rate, along with the earlier decline in the exchange rate, is having the expected effects on the economy and more can be expected, Stevens said. The full effects of the very accommodative stance of policy have not been seen at this stage. It will be supporting demand for some time yet, Stevens said. On the exchange rate, Stevens said despite the RBA not reverting to the use of the word uncomfortable, there is little doubt that significant parts of the trade-exposed sectors still find it quite uncomfortable: it continues to exert acute pressure for cost containment, productivity improvement and business model change. Let me be clear, again, that the exchange rate remains high by historical standards, Stevens said, in what seemed like an attempt at jawboning the currency. He emphasized the point by saying that by most measurements the Australian dollar is overvalued, and not by just a few cents. He acknowledged that this may be the effect of zero lower bound in several major economies but he still thinks that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point. On house prices, Stevens dismissed concerns of some commentators that the rise in prices should lead to a hike in the cash rate. Some use the B word, sometimes followed by calls for interest rates to be higher, Stevens said, in a reference to the word Bubble. The Bank has not seen developments in the housing market as warranting higher interest rates than the ones we have had, in the current circumstances, Stevens said. He noted that house price growth had slowed in some segments of the housing market recently, a positive development. It remains to be seen whether this slower pace of growth in dwelling prices is temporary or more persistent. It would in my opinion be good, for a range of reasons, if it did persist for a while, Stevens said. On the overall economy, Stevens said, there have been some early signs of the rebalancing taking place but there is quite some way to go before the rebalancing is complete. Meanwhile, efforts continue in that direction to contain costs and lift productivity. That amounts to an outlook for wages and prices that does not appear to threaten the inflation target, even were we to see a somewhat lower exchange rate, Stevens said.
Posted on: Thu, 03 Jul 2014 01:28:45 +0000
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