Five Takeaways From RBA Governor Glenn Stevens’s Testimony

Reserve Bank of Australia Governor Glenn Stevens delivered his semi-annual testimony to a parliamentary panel in Brisbane today in which he indicated lower interest rates were unlikely to accelerate growth; rather, what the economy needed was a release of “animal spirits.”

1) Interest rates, which have been unchanged at a record-low 2.5 percent for the past year, are unlikely to be adjusted.

“I’ve allowed the horse to come to the water of cheaper funding. I can’t make it drink,” Stevens told the committee of lawmakers.

“The governor’s testimony indicates that other issues, besides monetary policy, are holding growth back,” said Michael Workman, a senior economist at Commonwealth Bank of Australia. “Namely, a consistent and sustained lift in business confidence is required which would lead to higher non-mining business investment. The shift to more risk aversion by households and business restrains economic growth.”

Traders are pricing in about a 30 percent chance the RBA will cut rates by March, swaps data compiled by Bloomberg show.

2) Conditions are in place for a transition in the drivers of growth, Stevens said, while noting firms hadn’t taken up the opportunities provided.

“Many businesses remain intent on sustaining a flow of dividends and returning capital to shareholders, and less focused on implementing plans for growth,” he said. “Any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand.”

3) Currency intervention remains part of the RBA’s “toolkit,” even as the case for using hasn’t yet stacked up.

Stevens said the risk the Aussie would fall has been “materially underestimated” by traders, and added that lots of people are surprised the U.S. dollar isn’t higher given the Federal Reserve is likely to begin raising rates next year.

He said the RBA had thought seriously about intervening to push the Aussie lower when it was much higher, adding it then “went down and we haven’t revisited that level.” He said intervention is most successful when it “manages to change the market’s expectation about the future path of the exchange rate.”

4) The Australian economy is likely to grow at between 2 percent and 3 percent through June 2015, Stevens said, which is a little below the economy’s trend rate.

He said second quarter GDP data, due next month, was likely to be more subdued than the first three months of the year, when it was boosted by a surge in resource exports.

5) Australia’s July jobs report -- where the unemployment rate climbed to a 12-year high of 6.4 percent -- was “clearly a weak one,” Stevens said, while adding there may have been some survey issues that partly explained the result.

Stevens noted that there had been improvement in employment growth this year and a similar strengthening of leading indicators. Assistant Governor Chris Kent said high population growth is also increasing the number of people seeking jobs.

Australia is losing its developed-world-beating status as the mining investment boom that powered it through the global financial crisis wanes. The nation’s jobless rate in July jumped above the U.S. level for the first time since 2007, underscoring a division in policy outlook between the Federal Reserve, which markets bet will tighten next year, and the RBA’s flagged period of stability for its record-low benchmark of 2.5 percent.

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