RBA ready to cut cash rate again if needed but for now it is "prudent to sit still": Glenn Stevens

The Reserve Bank has left the door open to further cash rate cuts if non-mining sector demand does not pick up, but believes it is now "prudent to sit still" with mortgage rates near historic lows and house prices rising since May last year.

“Overall, there is a good deal of interest rate stimulus in the pipeline. At its meeting earlier this month the Board judged that it was sensible to allow it time to do its work,” said RBA governor Glenn Stevens in his opening statement to the House of Representatives Standing Committee on Economics.

“The board believed that the inflation outlook, at least as we assess it at present, would provide scope to ease further, should that be necessary to support demand. But for now, the Board decided it was prudent to sit still.”

CommSec economist Savanth Sebastian said Stevens had delivered “his clearest statement yet that interest rates are on hold at least until mid-year and possibly even longer.

“There wasn’t anything that was overly new in the Reserve Bank Governor’s commentary compared with what was released a fortnight ago in the Monetary Policy Statement.

“Rather his comments today provided more clarity and reinforced our view that interest rates are solidly on hold in the near term – especially given that the “substantial” stimulus measures are having an impact on the economy,” said Sebastian.

In his statement today Stevens continued along the theme of the February minutes, where he reported a number of signs of improvement in the housing market.

Stevens noted that the cash rate has been reduced six times over the past sixteen months, for a total decline of 175 basis points, with house prices rising since May 2012.

“Allowing for some change in the gap between the cash rate and other rates, lending rates nonetheless have fallen to be not far from their historic lows.

As a result, he said the share of household income devoted to interest payments has likewise “declined considerably”.

“Indeed housing ‘affordability’ as conventionally measured, for purchasers, has improved a lot over the past two years.

“That represents quite a substantial change in policy settings. It is having an effect. Housing prices have been rising since last May, having declined for a period prior to that,” he said.

Stevens also expects a strengthening in housing investment due to several factors, “interest rates are low, housing prices are tending to rise, gross rental yields have increased, population growth remains strong and is even picking up a little”.

However, he did express some concerns about the Australian economy as the mining investment peak draws nearer.

“Looking ahead, it appears that the peak in the level of resource sector investment is now close. It is a very high peak, but we do not think that there will be a rapid decline in the near term after the peak. However, it seems pretty clear that this type of investment will not be adding to demand for much longer.

“Investment spending by businesses in other sectors has thus far remained somewhat subdued in comparison. There are good reasons to expect it will strengthen in due course, but the available indicators at present do not suggest that is going to happen in the very near term,” he said.

Answering questions after making his statement, Stevens indicated “a bias to ease” and “an easing was more likely than a tightening" and also commented that the economy "entered a soft patch early in 2013".

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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