Another interest rate cut possible due to weak economy: Stevens

The Reserve Bank governor Glenn Stevens has left open the possibility of a further interest rate cut but warned against expecting monetary policy to do too much of the work in encouraging economic growth.

by: Michelle Grattan, University of Canberra

Speaking to the Economic Society of Australia, Stevens condemned the “inability to find political agreement” on infrastructure and called for a broad narrative for growth to boost confidence.

The economy is weak

Stevens said the economy was now weaker than had been forecast two years ago.

Then the forecast had been for growth in the range of 2.5% to 4% by mid-2015.time is money

As things stood, the outcome was likely to be either right at the bottom of this range or more likely a bit below it.

Looking ahead, the most recent forecasts suggested similar growth rates to those seen recently.

Residential investment would reach new highs, but resource sector investment had a good deal further to fall.

“The economy could do with some more demand growth over the next couple of years,” Stevens said.

In view of this “we might give some thought to trying to create some upside risks to the growth outlook through policy initiatives”.

Stevens said the Reserve Bank would stay attuned to what it could do.

“We remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth.”

But “monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems”.

Much of the effect of monetary policy came from the spending, borrowing and savings decisions of households but they already had a high debt burden, Stevens said.

This made it very important that “other policies coalesce around a narrative for growth”.

Stevens said the government was on the right track in not seeking to compensate for lower revenue growth by further spending cuts in the short run, although some resolution of long run budget trends would be needed.

Stevens said infrastructure spending had a role to play in sustaining growth and generating confidence.

It was not a short term countercyclical device but…

“it would be confidence-enhancing if there was an agreed story about a long term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product”.


It would mean “amenity would be improved for millions of ordinary citizens in their daily lives. We could unleash large potential benefits that at present are not available because of congestion in our transportation networks.”

Stevens said the impediments to this happening were not financial – the funding would be available given low interest rates.

“The impediments are in our decision-making processes and, it seems, in our inability to find political agreement on how to proceed.”

Physical infrastructure was only part of what was needed, Stevens said.

“The confidence-enhancing narrative needs to extend to skills, education, technology, the ability and freedom to respond to incentives, the ability to adapt and the willingness to take on risk.
It is in these areas too, where there are various initiatives in place or planned, but which often do not get enough attention, that we need to create a positive dynamic of confidence, innovation and investment.”

The Conversation

Michelle Grattan is Professorial Fellow at University of Canberra. This article was originally published on The Conversation. Read the original article.


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