Is the Reserve Bank losing its influence? Governor Glenn Stevens' admission during economic outlook update

Reserve Bank Governor Glenn Stevens has acknowledged concerns that the Reserve Bank's influence on demand may be limited, given the official cash rate's record low level.

Speaking at the House of Representatives Economic Committee in Sydney, the Governor noted that the Reserve Bank (RBA) board is "very conscious of the possibility that monetary policy's power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past".

"A decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy," said Stevens.

"Today, such a channel may be less effective."

Stevens does, however, believe that cash rate adjustments still have some effect on growth.

"Nonetheless we do not think that monetary policy has reached the point where it has no ability at all to give additional support to demand. Our judgement is that it still has some ability to assist the transition the economy is making, and we regarded it as appropriate to provide that support."

In his speech on Australia's economic outlook, he noted that strong housing price growth was a factor of consideration in the RBA's decision to cut the cash rate by 25 basis points to 2.25%.

"Another factor in our consideration was dwelling prices, which have continued to increase. Price rises in Sydney are very strong, and they are pretty solid in Melbourne," he said.

However, Stevens noted that the performance of property markets Australia wide are "much more mixed".

"Excluding Sydney, the rise for Australia as a whole over the past year was about 5%.

"That is a healthy pace but not alarming, and some cities have seen price falls. Developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds."

Following Stevens' remarks, the Commonwealth Bank commented: "The Governor sounds reasonably relaxed about house price trends and that any stimulus from rate cuts to housing activity can be contained.

"This is clearly an area that needs to be watched closely, particularly given the Governor’s comments about the changing effectiveness of interest rate changes. It probably also underlies remarks about the need to reload the fiscal cannon.

"The Governor believes that we should be on a better fiscal trajectory than we currently are."

During his speech, Stevens reiterated the importance of supporting the non-mining economy, saying that "at this point non-mining business investment spending is still very subdued".

"While several key fundamentals are in place for stronger performance, clear signs of a near-term strengthening remain unconvincing at this stage. This is a weaker outcome than we had expected six months ago," he said.

Stevens noted that although growth in non-mining sectors had occurred, it remained below average.

"Our expectation had been that a further pick-up would occur in 2015," said Stevens.

"When we reviewed our forecasts in late January, we didn't feel that growth in the recent past had been materially different from what we had estimated a few months ago. But when we tried to look ahead, we concluded that there were fewer signs of a further pick-up in non-mining activity than we had hoped to see by now.

"As a result, the revised forecasts we took to the February Board meeting embodied a longer period of below-trend growth, and a higher peak in the rate of unemployment, than earlier forecasts."