For interest rates, the only way is down

People might complain about mixed messages coming from the US Federal Reserve, but the same cannot be said about the Australia’s Reserve Bank at the moment.

The message from RBA Governor Glenn Stevens was about as unambiguous as a central banker can get: if there is to be a change in official interest rates in the next little while, the only direction will be down.

Mr Stevens highlighted the dovish sentiment currently prevailing at the central bank at the moment to the 2015 Economic and Social Outlook Conference in Melbourne today.

“Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening,” he said, adding that “an accommodative [monetary policy] stance will be appropriate for some time yet”.

But those hoping the RBA might be inclined to offset recent mortgage rate hikes by the big banks with a rate cut of its own are set to be disappointed.

Mr Stevens said that the recent increases had only partially reversed the decline in mortgage rates enjoyed by owner-occupiers this year, and those most affected were investors – a segment of the market policy makers will be happy to see cooled off a little.

Overall, the increases have been equivalent to half a 0.25 percentage point increase in the official cash, and have taken back just a quarter of the interest easing that has occurred since the start of the year, Mr Stevens said.

The RBA does not seem fussed by such a marginal tightening. The governor pointed out that “this increase is from the lowest rates that any current borrower will have ever seen”.

Change is happening

The central bank has also sought to bring some perspective to discussion about the country’s economic prospects, particularly the short-term growth path.

Mr Stevens said that the country had navigated the after-effects of the biggest terms of trade boom in 150 years reasonably well, managing to continue to grow despite the big plunge in mining-related investment.

Promisingly, he thought the country was about halfway through the decline, and the “headwinds” it was causing were currently about as intense as they were going to get.

The rebalancing of the economy away from resources-led growth toward other drivers of expansion, particularly burgeoning services activity, is, Mr Stevens said, well underway.

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