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Australia's central bank open to further easing, with caveats

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Australia's central bank said on Wednesday it was "open to the possibility" of more interest rate cuts if needed, while cautioning that ever easier policy had risks given households were already burdened with a large amount of debt.

[BRISBANE] Australia's central bank said on Wednesday it was "open to the possibility" of more interest rate cuts if needed, while cautioning that ever easier policy had risks given households were already burdened with a large amount of debt.

In a speech to a business lunch, Reserve Bank of Australia (RBA) Governor Glenn Stevens called for policymakers to create "upside risks" to economic growth with a heavy focus on the need for more spending on infrastructure. "We remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth," said Stevens, who cut rates to a record low of 2 per cent in May.

The local dollar fell a quarter of a US cent to US$0.7650 in reaction, which would please Stevens as he has repeatedly called for a lower currency.

Yet, Mr Stevens also warned monetary policy alone could not deliver everything that was needed and expecting too much from it could lead to "much bigger problems." In particular, heavily indebted households had less scope to use borrowing to fund more spending. "It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels," said Mr Stevens.

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Instead, it was important that other policies be used to generate growth. In this, Mr Stevens said the Liberal National government of Tony Abbott was on the right track in not cutting spending further in the near term.

Yet neither was public spending adding anything to growth, while public investment had fallen in the past year.

As such, Mr Stevens emphasised that more infrastructure spending could be a driver of growth and confidence. "I am doubtful of our capacity to deploy this sort of spending as a short-term countercyclical device," he said. "But it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects." Financing could be found and it would be perfectly sensible to use public debt to fund infrastructure that earned a return, he said. "The impediments are in our decision-making processes and, it seems, in our inability to find political agreement on how to proceed," Mr Stevens said.

REUTERS

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