Stevens Says `Chill Out' on Rates as Australia Bows to Slowdown

  • Treasury lowers economy's speed limit to 2.75% growth from 3%
  • RBA governor notes currency depreciation effect slow to emerge

Australia’s central bank Governor Glenn Stevens says markets should “chill out” on prospects for another interest-rate cut as the nation’s Treasury bowed to mounting evidence that the economy’s speed limit for growth had declined.

Stevens, who stood pat for the past six months at a record-low 2 percent cash rate, told economists Tuesday evening in Sydney they should enjoy the festive season and then reassess the economic data in February.

“I’m more than content to lower it if that actually helps but is that the best thing to do at any particular time?” Stevens said in response to a question on the cash rate. “We’ve got Christmas. We should just chill out, come back and see what the data says.”

His comments came hours after Nigel Ray, the deputy head of Treasury, told the same group the economy’s speed-limit -- or the growth rate at which inflation starts to accelerate -- would be lower in the next few years. Ray, who is responsible for Treasury’s macroeconomic group, said the potential growth rate was now 2.75 percent, down from 3 percent estimated when the government delivered its May budget.

Dimming Appeal

Australia’s appeal to the rest of the world is dimming as its China-fueled resources boom winds down: fewer migrants are seeking entry to the country, prices for the country’s commodities are declining, the currency is depreciating and wages are stagnating. Stevens has sought to put the best gloss on the picture by noting that the economy is still expanding and unemployment is contained as the country manages the dramatic adjustment.

“Stevens’ speech was less positive than the ’glass half full’ varieties that had been given as recently as Oct. 13,” said Cherelle Murphy, co-head of Australian economics at Australia & New Zealand Banking Group Ltd. “Crucial to the RBA over the holiday period” will be the outcome of the Federal Reserve’s December meeting, the next two Australian labor force reports and fourth-quarter inflation data, she said.

Near Term

Stevens in his speech briefly addressed the near-term outlook, reiterating that recent data pointed to improving prospects for industries outside mining and increasing employment, even though inflation has been weaker than expected.

“The effects of a decline in the exchange rate are proving a bit slow to come through. And slow wage growth makes for a low underlying rate of increase in domestic costs,” the governor said. “On this basis, the board concluded that inflation would not be a barrier to further easing of monetary policy, should that be useful to support demand,” he said, reiterating the central bank’s recent policy statement.

Data Wednesday showed further improvement in the labor market and a continued unwinding of mining investment. Job vacancies advertised on the Internet climbed 0.6 percent in October from a month earlier, while construction work done in the economy slumped 3.6 percent in the three months through September from the prior quarter, led by engineering.

The Aussie dollar was little changed at 72.65 U.S. cents at 4:01 p.m. in Sydney Wednesday after jumping 0.9 percent the day before. The currency has climbed against all its major developed peers since Oct. 30 and is poised for its first back-to-back monthly gains since June 2014.

Bernie Fraser

Stevens was asked whether he followed the rule of a former RBA governor, Bernie Fraser, that if inflation was contained and the economy needed to grow more, then the board should cut rates. Or did he think the impact of an easing was less than it once was. Stevens agreed with the latter.

A rate cut “isn’t, I don’t think, as stimulatory as it was when Bernie was deciding we’re going to bring the cash rate down from 18 percent to, in those days, 4.75 percent,” he said.

The probability of a 25-basis-point rate cut by the end of May was 41 percent on Wednesday, swaps data compiled by Bloomberg show. At the end of last month, traders had priced in an 84 percent chance of at least one cut by May and about a 50 percent chance of two reductions.

Forecasting Limitations

The central bank governor, who is due to step down in about 10 months, focused his speech on the limitations of forecasting, pondering that few economists predicted an environment of zero policy rates and quantitative easing 10 years ago.

Stevens has been urging the government for months to undertake economic reform to help increase the economy’s efficiency and grow the nation’s wealth. Since deposing Tony Abbott in September, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison have embarked on a debate to overhaul the tax system and on Tuesday accepted most of the recommendations of the government’s chief research agency to boost productivity.

Earlier in his speech the governor said he expected global interest rates to be “very low” for a good part of the period ahead.

Stevens ended his speech, likely his final one to the annual Australia Business Economists dinner, with some “uncontroversial” predictions:

  • That a big downturn will be a shock for many Australians as about half the workforce hasn’t seen “really high” unemployment and many in business haven’t seen how tough conditions can be when virtually every industry and region is contracting;
  • Economic forecasting is unlikely to change much, though “big data” may prove helpful; and
  • Human nature won’t change as people “will be irresistibly drawn to those who claim to be able to forecast the future, beat the market, and give us the illusion of certainty and control.”
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