An interest rate cut is still possible, but evidence of further economic weakness will not automatically trigger such a move, Reserve Bank governor Glenn Stevens warns.
A period of somewhat disappointing, but hardly disastrous, economic growth and well-contained inflation has allowed the interest rate to be cut to very low levels, the central banker said in a speech at the annual Anika Foundation Luncheon in Sydney on Wednesday.
“The question of whether they might be reduced further remains, as I have said before, on the table,” he said.
“But, in answering that question, it is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved.”
Monetary policy works, partly, by encouraging people to take risks, he said. But typically, that’s seen first in financial risk-taking – like borrowing to invest in assets such as shares or existing property rather than the expansion of new businesses and job-creation.
And, “beyond a certain point, it can be dangerous,” Mr Stevens said.
Even after the event, it can be hard to judge whether the policies have done too much. Policy settings that produced strong household borrowing growth leading up to 2006 would now be judged to have gone too far, he said.
“That is not the case at present, given the current rates of credit growth and so on.”
He said, future decisions would have to consider whether the economic growth they fostered was sustainable.
They’d also be based on the economy’s prospects, about which Mr Stevens was pointedly upbeat.
“Despite the doom and gloom and fulminations over the airwaves, in newspapers and in cyberspace, business confidence has risen in recent months,” he said.
He said that as he prepared his speech, news emerged that personal insolvencies were at their lowest level for a decade and income inequality in Australia had not increased, despite claims to the contrary.
“Perhaps we might be allowed to conclude that we have been meeting some of our challenges, thus far, with outcomes that, while not perfect, are not too bad.”
He said Australia’s future prosperity would depend on raising the economy’s growth potential, something that’s neither “just some esoteric concern for economists” nor a matter of “growth at any price”.
“Our collective ability to deliver social policy outcomes, to enjoy the benefits of a good society, or at a more basic level to provide public services and even to defend ourselves, ultimately rests on a productive economy.”
And, talk of economic reform should be presented as a positive narrative for economic growth, he said.
“We all know that competitive markets, investment in education, skills and infrastructure, and adaptability, are key parts of that growth narrative,” Mr Stevens said.