Finance Finance News Low rates can’t force people to spend, RBA says

Low rates can’t force people to spend, RBA says

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The Reserve Bank of Australia (RBA) is keeping an open mind on further interest rate cuts, but says monetary policy can’t do all the heavy lifting in the economy.

RBA governor Glenn Stevens made the statement while giving evidence to a federal parliamentary committee on the economy and its prospects.

He said past cuts to the cash rate were supporting growth, but consumers and businesses needed to have the confidence to take advantage of the opportunities this provided.

“Monetary policy can’t force spending to occur,” Mr Stevens told the house economics committee in Canberra on Wednesday.

“The board has maintained an open mind about whether we may need to lower interest rates further.

“In the end, though, firms and individuals have to have the confidence to take advantage of that situation.”

The cash rate currently stands at an all-time low of 2.5 per cent.

There’s speculation the central bank could cut rates again in early 2014.

Mr Stevens noted economic growth had moderated to between two per cent and three per cent in 2013.

Growth was below trend, which is usually seen at 3.25 per cent, due to subdued consumer demand even though there had been a strong rise in Australian exports.

“Consumer spending has been rising, but at a below-average pace, as people adjust to slower growth in income and look to contain or reduce debt,” Mr Stevens told the committee.

Looking ahead, Mr Stevens said there was scope for an uptick in consumer demand, albeit at a rate close to income growth.

“Higher wealth and confidence could see the saving rate decline a little, but consumption will not be the same driver of growth that it was before the financial crisis,” the governor said.

As a result, the RBA expects growth to continue to expand at a below-trend pace for “a bit longer”.

In the medium term, growth could strengthen as businesses invest more and take advantage of low borrowing costs.

“Low interest rates are doing the sorts of things we expect them to do,” Mr Stevens said.

However, the governor also said Australia could not assume solid growth in the future.

“It is hard to escape the feeling that we as a society have tended, for quite a long time now, to go about our decisions on such matters while making the assumption, perhaps without realising it, that solid growth of the economy will simply continue,” he said.

“We are at a moment now when that assumption has to be questioned.”

Mr Stevens said the Australian dollar had been “behaving” of late, after falling 13 per cent since February.

But the RBA still believed it was “uncomfortably high” and a lower exchange rate was necessary to deliver balanced growth.

Mr Stevens’ testimony is continuing.

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