Australia Central Bank Open to Rate Cuts, Mindful of Risks – Real Time Economics

Bloomberg News

Australian central bank Gov. Glenn Stevens said cutting interest rates further remained an option while adding that to keep on lowering would at some point invite danger to the economy.

“It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved,” Mr. Stevens said in a speech to a charity organization.

It’s the second time in recent weeks that Mr. Stevens has pointed to the possibility that the cash rate may be cut below its current record-low 2.0% setting–while acknowledging that any further lowering may push already surging house prices to unsustainable levels.

The Reserve Bank of Australia has cut interest rates twice this year as the economy has been hurt by plunging commodity prices, the end of a mining investment boom, and a slowdown in its biggest trading partner, China.

The cuts have helped to fan house-price growth particularly in Sydney, prompting the banking regulator recently to try and choke off lending to property investors.

Mr. Stevens said that, so far, credit growth hadn’t reached levels that would suggest conditions in the housing market nationally “had gone too far.”

Still, “a balance has to be found,” he said. Considerations surrounding the stability of banks are now a key element of monthly policy decisions.

More broadly, Mr. Stevens welcomed recent signs of improvement in pockets of the economy, noting that business conditions had improved in industries beyond mining, while the job market had shown surprising improvements.

Unemployment has fallen in recent months toward 6.0% defying RBA forecasts that it would head toward 6.5% this year and remain there for some time.

“The state of the labor market, while still somewhat subdued, appears to be better than we had expected three or six months ago,” Mr. Stevens said.

The RBA is currently assessing the reason for the subdued jobless rate, despite the economy growing by just 2.3% on-year in the first quarter, a pace considered well below that needed to support strong job creation.

“Statistical noise” might explain the jobs data, but it may also be that low wages growth is also helping firms to add staff, or potentially, the strength of the economy has not been reflected fully in the official data,” Mr. Stevenssaid.

He added that the economy was making the needed adjustments toward stronger growth in non-mining industries, but that the transition away from a mining-centered economy had been going a bit slower than expected.

Mr. Stevens said a debate about the trend growth rate in Australia might be required, given some of the strength in recent data. He said he was also encouraged by the recent unexpected strength in China’s economic growth, saying stimulus policies in the world’s second-largest economy may be working.

The impact of recent volatility in China’s share market on that nation’s economy were unclear, but may prove to be small, according to Mr. Stevens. “The rise in share prices was probably too short-lived for there to have been much in the way of positive wealth effects on spending,” he said.

 


 


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22 July 2015 | 10:34 am – Source: blogs.wsj.com

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