Stevens Says Inflation Outlook Gives RBA Room to Cut If Needed

  • Weaker dollar helping output, Stevens says in AFR interview
  • RBA has set interest rate at record-low 2% for eight months

Reserve Bank of Australia Governor Glenn Stevens said the inflation outlook means policy makers have room to cut interest rates again if needed to help the economy.

“The stated position of the board is that inflation is sufficiently low that, if it makes sense to ease a bit further to help the economy, then we can,” Stevens said in an interview with the Financial Review published Wednesday. “That remains our view.”

The weaker exchange rate “certainly has had a beneficial effect for output,” and a further adjustment by the Australian dollar is possible as commodity prices drop, he said. The currency has fallen about 30 percent since the start of 2013.

Australia’s central bank has kept interest rates unchanged at a record-low 2 percent as it gauges the impact of looser policy and a lower currency on an economy grappling with unwinding mining investment. While commodity prices are plunging and wage growth is weak, there are signs low rates are gaining traction as consumer confidence has held up and the country recorded its best pack-to-back monthly employment gain since 1988.

Missing Story

The central bank, while talking up the economy’s outlook, has left the door open to even lower rates if needed, citing tame inflation that’s likely to remain consistent with the target for the next couple of years. Stevens told the AFR that a recovery in investment outside mining remains a “kind of a missing story” in the economy.

Asked about this week’s Federal Reserve meeting, Stevens said no one should be surprised if the U.S. central bank raises its benchmark rate. He said that while there may be some potential “upset” from the decision, “that’s a far cry from saying it’s going to bring down the global system.”

“Even though it’s very well telegraphed, there’s still that residual bit of uncertainty as to, not so much what they will do but, what they will say,” he said. “So it’s not surprising that markets wring their hands a little bit and so does the media. I mean, they’ve got to wring their hands about something and that’s the topic for this week.”

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