RBA’s Stevens Says Economy Warrants Low Rates for Some Time Yet

Australia’s economy has spare capacity and contained inflation that allow it to maintain loose monetary policy, central bank Governor Glenn Stevens said.

“The level of interest rates, although very low, is well warranted on macroeconomic grounds,” Stevens said in the text of a speech to a function in Melbourne yesterday. “Monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet.”

Stevens’s speech traversed familiar ground on an economy transitioning to growth drivers beyond mining. In minutes of its Nov. 4 meeting also released yesterday, the Reserve Bank of Australia reiterated a period of stability for rates that have been unchanged at a record-low 2.5 percent for 15 months.

It has opted to stand pat to encourage non-mining companies to take a risk and invest as resources investment declines and commodity prices fall. While the property market has surged, businesses in other areas of the economy have been reluctant to spend even as the RBA sought to provide the right conditions.

Responding to a question from the audience after the speech on risks to the growth outlook, Stevens said: “personally I think I’m less worried by the prospect that things will be too strong than by the possibility that they will be too weak in the near term.”

‘Material Risk’

He said after the speech that there is a “pretty material risk” that the currency will go lower than its current level.

The Australian dollar has fallen more than 6 percent in the past three months, easing some pressure on import-competing industries. It averaged 93 U.S. cents in the past seven years and touched a record of more than $1.10 in 2011.

“An exchange rate more in line with fundamentals would be a helpful contributor to a balanced growth outcome,” Stevens said in his prepared remarks to the Committee for Economic Development of Australia.

The nation’s terms of trade, or export prices relative to import prices, have fallen 22 percent since their peak in the third quarter of 2011 and will fall further, he said.

On the brighter side, the governor said that recent data confirm labor productivity has grown faster over the past three years than it did on average for most of the 2000s.

Property Bonanza

Loose policy has boosted house prices, which climbed 13.1 percent in Sydney in the year through October and 8.9 percent in Melbourne, according to an RP Data-CoreLogic Home Value Index. That has underpinned a revival in housing construction.

“Investment in new and existing dwellings is rising,” Stevens said. “It ought to be possible, if we are being sensible both on the demand management side and the supply side, for this to go further yet and, more importantly, for the level of activity to stay high for longer than the average cyclical experience.”

The RBA’s concern is the jump in credit to investors that has risen to an annual rate of 10 percent in the past six months, with investors accounting for almost half of new loans.

“It is not clear whether this acceleration will continue or abate. It is not clear whether price increases will continue or abate,” Stevens said. “Furthermore, it is not to be assumed that investor activity is problematic, per se. A proportion of the investor transactions are financing additions to the stock of dwellings, which is helpful. It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.”

A Little Overexcited

Yet Stevens said it was reasonable to probe whether people are getting “a little overexcited” and whether home-lending standards are being maintained.

Discussions between the RBA and other agencies on possible action to ensure standards are upheld is aimed at stretching out the upswing in housing construction rather than to restrain it, he said.

Stevens disputed the standard view that Australia has avoided recession for the past 23 years, as shown by data. He said he would describe the period at the end of 2000 and 2008 as shallow recessions.

“Australia’s economy is continuing to grow, moderately,” Stevens said. “It has been responding in ways you would expect to the remarkable set of circumstances it has faced over the past decade. There is continuing adjustment ahead and doubtless no shortage of challenges.”

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