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Australia rates to stay low for some time given spare capacity: RBA

Tuesday, November 18, 2014 - 16:40
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Australia's top central banker on Tuesday said interest rates were likely to remain very low for some time yet, while any steps to contain over-exuberance in the housing market would be finely calibrated rather than blunt.

[MELBOURNE] Australia's top central banker on Tuesday said interest rates were likely to remain very low for some time yet, while any steps to contain over-exuberance in the housing market would be finely calibrated rather than blunt.

Reserve Bank of Australia (RBA) Governor Glenn Stevens said there was plenty of spare capacity in the economy now that a boom in mining investment was winding down, which in turn should keep inflation well contained. "In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet," Mr Stevens told a dinner of business economists.

Indeed, Mr Stevens made it sound as if any thought of tighter policy was a distant prospect. "There are sufficient spare labour resources such that we could probably enjoy a couple of years of non-mining sector growth somewhat above its trend rate before we needed to worry too much about serious inflation pressure," he said.

Financial markets imply no chance of a rise in rates for at least the next 12 months, though many economists think a move is possible from the third quarter of next year.

One hot spot in the economy has been home prices, which have risen at a double-digit annual pace in recent months in large part due to demand from property investors.

Mr Stevens emphasised that this was not a bad thing in itself, especially as it was spurring a much-needed revival in home building while supporting household wealth and spending. "But for accommodative monetary policy to support the economy most effectively overall, it's helpful if pockets of potential over-exuberance don't get too carried away," he said.

As a result, the RBA was working with other regulators on plans for "suitably calibrated and focused action" to make sure banks were maintaining their lending standards.

The Australian Prudential Regulation Authority, which oversees the banks, has said it will likely announce tighter lending standards before the end of the year.

Mr Stevens any action would also be taken with a mind to prolonging the recovery in home building. "A high level of construction, maintained for a longer period of time, is vastly preferable to a very sharp boom and bust cycle," he said.

REUTERS