RBA’s Stevens Sees Loose Global Monetary Policy for a While

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Australian central bank Governor Glenn Stevens said “very accommodative” global monetary policy is likely to remain in place for quite a while, and his counterparts will be forced to rely on regulatory measures to contain potential financial excesses.

In a philosophical sweep across the international policy landscape, Stevens said Tuesday that inflation “looks a bit too low globally” and mused that financial stability could replace price stability as a central bank’s prime objective some time in the future.

“More has been asked of central banks, under circumstances in which monetary policy might reach the limits of effectiveness, and yet at a time when it seems the ability of other macroeconomic policies to contribute to growth has lessened,” he said in the speech in London. “A previous generation of central bankers, who fought lengthy battles to rid their respective countries of high inflation, are surely looking on in disbelief.”

The threat of slower price gains proved enough for at least 30 central banks to ease monetary policy this year, led by the European Central Bank’s embrace of quantitative easing.

The Reserve Bank of Australia chief, who will end 10 years at the helm in 2016, didn’t address the nation’s economic outlook or interest rates in the speech.

Aussie View

In a question-and-answer session after the speech, Stevens said the RBA’s view on the Australian dollar hasn’t changed, and that “further depreciation is both likely and necessary.”

Australia’s direct exposure to Greece is “miniscule” and its crisis is unlikely to have a material impact on the country unless there’s major upheaval in global markets, he said.

In response to a question about risks in financial markets, Stevens said: “There is a sense in my discussions with private market participants that the underlying liquidity of many markets is not what it used to be.”

That is a potential challenge when the “interest rate tide turns, as it’s anticipated to do, at least in the U.S.,” he said. That reversal of policy direction is unlikely to happen for a long time in some of the other major jurisdictions, like Japan or Europe, he said.

“People have stopped short of saying that the goal of monetary policy should be changed from price stability to financial stability alone (though it is not impossible that a decade from now that will have changed),” he said in the speech.

Stevens said that in their efforts to maximize the effect of easy policy stances, central banks have sought to offer guidance, setting out the conditions in which they would adjust policy and even provided a sense of the likely pace.

“The forthcoming ‘lift-off’ by the Federal Reserve, when it happens, will surely be the most telegraphed monetary policy adjustment in history,” he said.

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