RBA likely to sit on its hands as global anxiety persists

Comments made by RBA governor Glenn Stevens today suggest the bank will hold tight on interest rates while global "anxiety” remains and expectations that inflationary pressures may ease.

In response to questions about monetary policy at House of Representatives Economics Committee meeting in Melbourne, Stevens said that during “times of extreme turbulence, it is good to sit still”

“We are in a position to exert a certain degree of restraint right now - inflation looks like it is OK in core terms,” he said.

He also hinted that the RBA could cut rates if the global situation deteriorated alluding to the big cuts it made to interest rates in late 2008, early 2009 following the GFC.

Stevens said it monetary policy continued to be about “balancing various forces (global and local)” and that it was not getting any easier.

On the global front, while he said uncertainty has not gotten worse, “some serious volatility in equity markets” has been witnessed this week indicating there is still a bit of angst out there in international financial markets.

The key concerns are the sovereign debt issues facing the US and Europe, a problem which Australia does not have to contend with. He said the prospects in Asia remain good and that the Chinese economy is still going well.

“But we cannot say the [global] anxiety has gone away.”

The RBA will look at global factors in light on what impact they might have on demand and hence on prices.

He said households were being prudent by saving, but noted the negative effects were being felt by retailing following a period of 15 years of “appalling saving and high spending”

The increase in savings and more caution, Stevens said would leave households finances in good position, if there is a downturn at some point.

In his speech preceding questions from the committee Stevens noted that “asset prices have declined, credit growth has moderated further and the exchange rate remains very high”.

“While each of these is affected by factors other than monetary policy, together they suggest a fair degree of restraint is being exerted by financial conditions. Under the circumstances, the Board judged the most prudent course was to sit still through this period, in spite of inflation data that, on their face, continue to be concerning.”

“Looking ahead, the year-ended CPI inflation rate will probably remain well above 3% in the September quarter. It is then likely to come down as the impact of last summer's floods on food prices continues to unwind; we will see those effects around the end of the year and the early part of next year.” 

Stevens says the bank will abstract carbon price effects in setting monetary policy, just as it did with the implementation of the GST a decade ago. 

“It is the more persistent path of inflation on which the bank must focus.”

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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