It is not often that you hear a central banker urge people to take on risk.
But that was the unexpected pitch from Reserve Bank of Australia Governor Glenn Stevens yesterday as he pondered where growth would come from now that the mining investment boom has all but ended.
In an intriguing passage in his speech to the Anika Foundation in Sydney, Stevens made it clear that nervous savers were in the policy sights of the central bank.
He said that, in lowering interest rates, it had been the RBA’s intention to prod nervous savers into backing out of increasingly expensive safe havens and instead start searching for growth.
As the Governor put it, “One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing”.
So there you have it, an endorsement from the RBA to take on more risk.
Australia’s central bank, like many others around the world, has done much of the policy work to support growth as governments have concentrated on budget repair and businesses have shied away from debt.
In comments that have imparted fresh momentum to rate cut speculation, Stevens said there was no “serious impediment” to easing monetary policy from its already “very accommodative” setting of 2.75 per cent.
Following his remarks, markets put the odds of a cash rate cut to 2.5 per cent when the RBA Board meets next Tuesday at 94 per cent.
But by his own admission, the Governor is unsure this will be enough to bring about a vital turnaround in confidence.
“It is somewhat concerning that the business community’s confidence has been quite subdued in recent times,” Stevens said. “It would be good if there was a bit more confidence in the business community about the future. Unfortunately…there’s no such thing as a ‘confidence policy lever’.”
The dour mood of business has meant investment in the non-mining sector remains soft, raising the prospect that economic activity – already below average – will slip even lower as the investment phase of the mining boom peters out.
It has also meant that funds that might otherwise go into productive investments have instead been locked up in conservative low-growth but relatively secure assets.
As Stevens said, this has come at a cost to both investors and the economy: “With many investors wanting safety, the price of safety has risen”.
Flagging that more rate cuts may be on the cards, he warned the price would probably have to rise even higher to encourage more adventurous use of funds.
“It [the price] has to rise by enough to prompt at least some people to start to shift their portfolios in the direction of taking some more risk – by holding equities, physical assets and so on, though obviously we don’t want too much risk-taking,” he said.
When even a central banker is urging investors to take a few more chances, you know the flight to security has gone too far.