Error
  • JUser: :_load: Unable to load user with ID: 82
Menu
Cuzz Media

Cuzz Media

Cuzz Media is part of t...

NAB VICTIM

NAB VICTIM

In late 2008 we became vi...

Banking In Australia Today

Banking In Australia Today

Visit Banking in Austra...

Donate Please

Donate Please

We need your support. ...

Prev Next

RBA's Glenn Stevens: Why we cut interest rates

SYDNEY, AUSTRALIA - FEBRUARY 13: Glenn Stevens speaks at the House of Representatives Standing Committee on Economics on February 13, 2015 in Sydney, Australia. (Photo by Daniel Munoz/Fairfax Media) Photo: Daniel Munoz SYDNEY, AUSTRALIA - FEBRUARY 13: Glenn Stevens speaks at the House of Representatives Standing Committee on Economics on February 13, 2015 in Sydney, Australia. (Photo by Daniel Munoz/Fairfax Media) Photo: Daniel Munoz
Having just cut the official cash rate to a new record low, Reserve Bank of Australia governor Glenn Stevens stepped up to take questions from federal politicians in southern Sydney on Friday.

Addressing the House of Representatives Standing Committee on Economics at Club Central in Hurstville, Mr Stevens outlined the central bank's case for the first rate cut in 18 months and commented on a number of key issues facing the Australian economy.

Here are five key takeaways from the RBA governor's semi-annual testimony:

The Australian dollar

Mr Stevens noted that while the Australian dollar has come down significantly against the US greenback, it has actually declined against a basket of major currencies. The decline in the Australian dollar was in large part due to the strength of the US dollar and would be "helpful" for the Australian economy, he said.

"As to whether it's the right level, here's where I have to be careful," Mr Stevens explained. "We have said over time that we thought the exchange rate would decline and needed to decline in order to balance growth in the economy."

"When the terms of trade fall, you expect the currency to fall. At various points in times, it might have looked like it wasn't doing that as much as expected and we had some things to say for that reason. It seems to me that the exchange rate is doing what is it expected to do."

Despite threatening to hit a fresh near-six-year low, the Australian dollar recovered from US76.44¢ on Thursday and is currently trading around US77.47¢.

Interest rates

Members of the central bank were questioned on what had changed to push them to cutting rates in February to a new record low of 2.25 per cent.

 "The stability language was basically saying 'keep calm – don't run to the edge of the boat'. Enough people got the message so that was helpful," Mr Stevens said.

"It is not our job to make sure nobody is surprised. We don't go out of our way to make them surprised. I'm sorry, it happens sometimes."

Indicators of the health of the economy were not bad, and growth up until this point had not been bad, but indicators for the future health of the economy were not as good as hoped for, Mr Stevens said.

"We were hoping for a period of stability, but we were faced with the question of 'if the economy needed a bit of support could we provide that'?," Mr Stevens said.

Taking a fresh look at the outlook, "we came to the conclusion that [the economy] could do with a bit more help."

First-home buyers

The governor was pressed on housing affordability, especially for younger people, by some school children. The issue has been at the forefront for some time, and Mr Stevens, once again, acknowledged its significance.

Mr Stevens said he wasn't worried about rising interest rates and the possible crunch they could create on young people who have borrowed in the current low-rate environment because banks should be, and have been, testing their borrowing strength.

"The biggest enemy for first-home buyers is rising housing values. In my opinion, it's a social issue of real importance, how will your generation afford to house itself? The answer doesn't really lie with us. The answer is, in my view, more innovative and flexible use of the land we have," Mr Stevens said.

Mr Stevens said that more public transport infrastructure and more availability of land will be needed to help address the issue of housing affordability.

Mr Stevens said we would be wary about extending mortgage tax deductions to first-home buyers.

"The young people that buy [homes] get that extra $7,000 or $14,000 and that ends up going into higher prices, so people who benefit are those selling the houses. That's ultimately where it goes," Mr Stevens said.

"It we extend our mortgage deductibility, I'm worried we'll have a similar phenomenon of higher prices."

Getting the economy in order

With Australian government bond yields at record lows, Mr Stevens cautioned that borrowing costs may not always be as benign for the government as they are now.

"I'm not saying that there's imminent disaster waiting for us, but I think the path we're on isn't the right path."

Mr Stevens indicated if there was a significant economic downturn, financial markets may not be as accommodative in future as they are now.

Australian government 10-year bond yields are currently at 2.508 per cent and hit a low of 2.248 per cent earlier in February.

"Suppose we did have a significant downturn in the economy, the deficit would quickly go from 2 per cent to 5 per cent of GDP."

Mr Stevens was quick to point out that this was simply a scenario and it would not necessarily happen.

"If that occurred, then we would add to debt much more quickly and which ever government finds itself in office when that occurs, you will find much less discretion in financial markets."

"We had scope then [2009] and we probably have scope now, but you don't want to be in a position where you don't have scope."

"Some of the countries that found themselves having undertake austerity didn't have a choice, they didn't have the market access."

"We're not in that position."

Unemployment

On Thursday, Australian Bureau of Statistics reported that January's jobless rate rose to 6.4 per cent - its highest level since August 2002 -as the economy shed 12,200 jobs. The number of unemployed rose 34,500, the biggest monthly increase since September 2012.

The Reserve Bank is forecasting the jobless rate will move incrementally higher, but that doesn't necessarily mean that the economy is doing badly, rather that growth can't keep up with its current pace.

"The most obviously reason is that the economy is growing, it is creating jobs, but it is below trend. We will grow jobs, but not enough jobs," Mr Stevens said.

"I caution against overreaction to one monthly number. Really the economy needs more growth and that's what we're trying to encourage."

Author: Max Mason
Source: The Age
Last modified onMonday, 16 February 2015 02:02

Leave a comment

Make sure you enter all the required information, indicated by an asterisk (*). HTML code is not allowed.

back to top

News

Major Topics

Helpful Resources

Socialize

About Us