Interest rates to rise, but not cause hardship: RBA
October 19, 2009
The Reserve Bank of Australia has provided a further update on the monetary policy outlook, with RBA Governor Glenn Stevens reiterating that they were still focussed on returning to a more ‘normal’ setting. In a separate speech, another senior official from the central bank has added that any movements in the near term would not be likely to cause financial hardship for Australian households.
Governor’s speech boosts rate expectations
Last week’s speech by Mr Stevens had credit markets pricing in quicker interest rate rises and analysts clamouring to be the one with the highest prediction for rates by the middle of next year.
Despite this, there was little in what the Governor had to say beyond what has previously been discussed. Out of context one sentence had people believing half-point or even three-quarter percentage point rises could be on the way but when looked at in its entirety the position of the central bank appears unchanged. That is, they are looking toward steadily taking interest rates up toward a more normal setting (about 5-6 per cent) from the current historically low level of 3.25 per cent.
“We have said that, over time, interest rates will need to be adjusted towards a more normal setting as the economy recovers,” Mr Stevens reiterated. “A step in that direction was taken last week. Of course, there are still important matters of judgement in the timing and pace of how that is done. The global outlook remains uncertain and the Board is very conscious of that.”
“The Board is also conscious, though, that a risk-management approach requires policy to be recalibrated as circumstances change,” he added. “If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework. Experience here and elsewhere counsels against that approach.”
The implication that they did not want to be “too timid” was what drove the bullishness about higher than expected rate rises, but it should be noted that the rapid decline in the cash rate from 7.25 per cent to 3 per cent was driven by what Mr Stevens described as “the most dramatic sequence of financial events we are ever likely to see”. As such, a rapid surge in the cash rate could only be justified by above average growth or rising inflation levels - neither of which appear likely in the short-term.
“None of this is to say that the economy is, at this moment, ‘too strong’,” Mr Stevens continued. “It isn’t. The point is, rather, that the very low interest rate settings were designed for a weaker economy than we are in fact facing. Plainly, the downside risks to which the Board was responding earlier have not materialised.”
“This is not a problem. In fact, it is a very desirable situation.”
Mr Stevens added that the period of greatest weakness for the Australian economy had “probably past”.
Rate rises won’t create hardship
Speaking at an economic conference yesterday, Reserve Bank of Australia (RBA) Assistant Governor of Economics, Philip Lowe, suggested that any rate rises will not cause great difficulty for home owners/buyers.
“I think most borrowers understood that the setting of monetary policy we had over the last year was unusual,” Dr Lowe noted. “As interest rates rise, I think most people have factored that into their budget considerations, so we are not expecting that to cause budgetary difficulties.”
Dr Lowe added that rates would rise as risks to the economy petered out.
“There are certainly still risks out and there are certainly still uncertainties, but not the same risks and not the same uncertainties that were there in the March quarter,” he advised. “And as those risks and as those uncertainties diminish, it is entirely appropriate that we go back to a more normal setting of monetary policy.”