RBA’s Stevens Seeks to Ease Concerns on China, Housing Risks
Reserve Bank of Australia Governor Glenn Stevens sought to ease concern his nation is vulnerable to shocks from a slower Chinese economy, a domestic housing slump and global financial stress, saying it remains a “lucky country” with a favorable outlook.
“Even if the pessimists turn out to be right on one or more counts, it doesn’t follow that we would be unable to cope,” Stevens said in the text of a speech today in Sydney that didn’t directly address monetary policy. “Acting sensibly, with a long-term focus, has as good a chance as ever of seeing us through whatever comes our way.”
Responding to questions after his prepared remarks, Stevens said monetary policy is “about right,” with inflation near the lower end of the RBA’s 2 percent to 3 percent target range. A government report on consumer prices in the April-June period is scheduled to be released tomorrow.
The Australian economy is under scrutiny because of its dependence on iron-ore and coal sales to China as well as concern about a property bubble with housing prices that are among the most expensive in the developed world.
Australia dodged the 2009 global contraction after the government boosted spending and the central bank lowered interest rates. The economy is in its third decade without a recession.
“In the final analysis, a serious deterioration in international economic conditions would still see Australia with scope to use macroeconomic policy, if needed, as long as inflation did not become a concern, which would be unlikely in the scenario in question,” Stevens said in the speech titled “The Lucky Country.”
The Australian currency has risen 46 percent against the U.S. dollar since the end of 2008 amid the biggest resources boom in more than a century, hurting industries such as tourism and manufacturing. The RBA has lowered borrowing costs by 125 basis points since November to 3.5 percent, still the highest among major developed nations, to help maintain the expansion.
“From where I’m sitting, we’ve got an unemployment rate in the low 5s, let’s call it that, an inflation rate, we’ll see what happens tomorrow, but it’ll be probably near 2 percent, banks are strong, government finances are in reasonable shape, currency is sound -- not too shabby,” Stevens said in response to a question from the audience.
Consumer-price growth in Australia has eased recently and a government report tomorrow may show a measure of core inflation was 1.9 percent in the 12 months to June 30, according to the median estimate of economists in a Bloomberg News survey. That would be the slowest pace since 1999.
Asked whether Australia’s low inflation and low long-term yields indicate monetary policy is too tight, Stevens said: “I think things are about right. Our recent communication is that we think the setting’s about right for the circumstances we face.”
Europe’s debt crisis and China’s slowest growth since 2009 prompted BHP Billiton Ltd. (BHP), the world’s largest mining company, to reduce planned spending on new projects. Gross domestic product growth in China, Australia’s biggest trading partner, slowed for a sixth quarter to the weakest pace since the global financial crisis, a report this month showed.
Recent data in China suggests “that so far, this is a normal cyclical slowing, not a sudden slump of the kind that occurred in late 2008,” Stevens said, adding that Australia will feel the effects of the Chinese business cycle more than it has in the past. “But even so, it may be better to be exposed to a Chinese economy with a high average, even if variable, growth rate, than, say, to a Europe with a very low average growth rate that is apparently also still rather variable.”
Stevens addressed the notion that Australia’s property market faces a slump similar to that seen in the U.S. and other developed nations. Australian house prices declined in the three months through March in the longest stretch of declines in at least a decade, and are down 6.1 percent from their mid-2010 peak.
“Historical or international comparisons, to the extent they can be made, do not constitute definitive evidence of an imminent slump,” Stevens said. “The repayment on a new loan on a median-priced house as a share of average income is now at its lowest for a decade.”
Stevens acknowledged that Australia’s low unemployment rate, which has hovered near 5 percent for the past two years, has helped support the housing market, while noting that a high proportion of households are ahead on their mortgage repayments, providing them with some buffer.
“It has to be said that the housing market bubble, if that’s what it is, seems to be taking quite a long time to pop - - if that’s what it is going to do,” he said. “The ingredients we would look for as signaling an imminent crash seem, if anything, less in evidence now than five years ago.”
Stevens also said Australian banks have become less reliant on overseas funding as they increase the amount they get from deposits.
“A reasonable conclusion is that the degree of vulnerability to a global panic of any given magnitude appears to have diminished, rather than grown, over the past few years,” he said. “It hasn’t completely disappeared, and it would not be sensible to expect it would, unless we were pursuing a policy of financial autarky. But there is little reason to assume that Australian institutions are somehow unusually exposed to these risks compared with most of their counterparts overseas.”
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