Rate cuts await

Port Douglas & Mossman Gazette - - FRONT PAGE -

WEST­PAC’S es­teemed chief econ­o­mist Bill Evans be­lieves the Re­serve Bank has switched fo­cus from the slow­ing econ­omy – due to the down­turn in min­ing – to a new fo­cus on the ex­change rate.

Mr Evans be­lieves the Re­serve may still need to stim­u­late the econ­omy if the Aus­tralian dol­lar stays stub­bornly high, and the way to do this is through lower in­ter­est rates – and it will even­tu­ally reach this de­ci­sion.

He said the min­utes to the last RBA meet­ing showed clear em­pha­sis on the ex­change rate, quot­ing the min­utes as say­ing ‘‘mem­bers noted that a lower level of the ex­change rate would likely be needed to achieve bal­anced growth in the econ­omy’’; and ‘‘the Aus­tralian dol­lar, while be­low its level ear­lier in the year, re­mained un­com­fort­ably high’’.

With great an­tic­i­pa­tion econ­o­mists at­tended Re­serve Bank Gov­er­nor Glenn Stephens’ speech to the Aus­tralian Busi­ness Econ­o­mists on Novem­ber 22 which was ti­tled, The Aus­tralian Dol­lar –Thirty Years of Float­ing.

Mr Evans said: ‘‘At one stage of the evening the Gov­er­nor noted that in­ter­est rates are at a 50-year low even though growth and in­fla­tion are not at 50-year lows – that be­ing be­cause the ex­change rate is so high. The clear im­pli­ca­tion is that if fi­nan­cial con­di­tions are to be eased then a lower ex­change rate is a prefer­able op­tion.

‘‘Pre­sum­ably, un­ease with prospec­tive move­ments in house prices is the source of dis­com­fort in us­ing the in­ter­est rate lever any fur­ther. In ear­lier speeches the Gov­er­nor has in­di­cated that, to date, house prices have not moved out of line with in­comes. The tra­jec­tory of house prices over com­ing months will be a key de­ter­mi­nant as to whether the Bank be­lieves that, in fact, it still does have some in­ter­est rate flex­i­bil­ity.

Mr Evans went on: ‘‘It is our view that the econ­omy will evolve to in­di­cate that fur­ther stim­u­lus is re­quired and in­ter­est rates are the ap­pro­pri­ate in­stru­ment.

‘‘At present it ap­pears that the Bank be­lieves that the cur­rency is the ap­pro- pri­ate source of fur­ther fi­nan­cial eas­ing. Given that it has not es­tab­lished that the Aus­tralian dol­lar is nec­es­sar­ily markedly over­val­ued nor do we have any clear idea of the fu­ture path of the terms of trade or the poli­cies of the ma­jor cen­tral banks it seems to me that in­ter­est rates of­fer a much more re­li­able op­tion for fur­ther stim­u­lus. Re­ly­ing on low­er­ing the cur­rency by ‘jaw bon­ing’ or un­con­ven­tional, and po­ten­tially risky, means seems less at­trac­tive es­pe­cially when, by global stan­dards, we have am­ple flex­i­bil­ity around in­ter­est rates.

‘‘ In sum­mary, the Re­serve Bank does ac­knowl­edge the econ­omy needs fur­ther stim­u­lus. How­ever its pre­ferred pol­icy ap­proach is through the AUD.

‘‘With un­cer­tainty around whether it is in­deed over­val­ued; the va­garies of poli­cies in other cen­tral banks and the terms of trade; and the risks as­so­ci­ated with in­ter­ven­tion, it is my view that in­ter­est rates rep­re­sent a much more cer­tain and less risky op­tion.

‘‘In time we ex­pect that the Bank will come to a sim­i­lar con­clu­sion.’’

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.