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Rates unlikely to change

By David Gordon

Rates unlikely to change while global uncertainty remains: RBA’s Glenn Stevens

The Reserve Bank is unlikely to change interest rates while anxiety and uncertainty remains in global financial markets, RBA governor Glenn Stevens has suggested.

Stevens expects that global anxieties are not only having an impact on consumer spending behaviour but could help ease current inflationary pressures.

In a speech made today in Perth titled “Still Interesting Times”, he also stressed that people should not jump to conclusions about the current sovereign debt issues in Europe being comparable with the 2008 GFC.

Stevens says during periods of “sudden increases in anxiety within international financial markets are moments when, if at all possible, it is good to be in a position to be able to maintain steady settings”.

“In the recent few meetings, the board has judged it prudent to sit still, even though we saw data on prices that were, on their face, concerning. To be in that position of course requires timely decisions to have been made in earlier periods.”

Looking ahead at future cash rate decision, Stevens says the task for the board would be to assess what bearing recent information and international and local events will have on the medium-term outlook for demand and inflation.
Stevens says the current environment presents “no shortage of challenges” though he stresses that it should not be assumed that it is necessarily the GFC crisis of 2008 all over again.

“It is reasonable to conclude, at this point, that the outlook for global growth is not as strong as it looked three months ago. Forecasters are generally revising down global growth estimates for 2011 and 2012, mainly as a result of weaker outcomes for the major countries,” he says.

Inflation remains a concern, with Stevens highlighting that while growth seems to be weaker than expected at the end of last year, underlying inflation seems to be higher.

“A key question is whether that is just the vagaries of statistical noise and lags, or whether it is telling us that the combinations of growth and inflation available to us in the short term are less attractive than they seemed a few years ago. If the latter, the spotlight will come back on to supply-side issues.”

Stevens addresses the question of its inflation targets, which have guided the bank in the past on adjusting inflation rates in less globally volatile times.

“Sometimes people ask whether a higher target for inflation might not be better, particularly when inflation is looking like it will rise and the bank is running a setting of monetary policy designed to resist that.

“The answer ultimately hinges on how prepared we would be to accept the things that would go with higher inflation. Higher average interest rates would be among them – there is no reason that savers, any more than wage earners, would be prepared simply to accept an erosion of their financial position.”

Furthermore, he says whatever structural challenges the economy faces will still have to be faced at higher inflation rates.

“Higher inflation wouldn’t make those issues go away, nor make them any easier to cope with (as we know from our own history when inflation was high and structural change still had to occur). We would simply waste more real resources as everyone sought to protect themselves from the higher inflation.”

Stevens points out that credit growth has slowed a bit further and asset prices have tended to decline.
“These factors, along with ongoing evidence that underlying inflation had turned up, were incorporated in the bank’s outlook as published early last month,” he says.

Explaining the 2% to 3% inflation target setting, Stevens says the bank has “a fair bit of history now” dating back to the early 1990s and he acknowledges the work of former RBA governor Ian Macfarlane in determining the current monetary policy framework.

“We arrived at this framework after a long search – the ‘search for stability’ set out in detail by Ian Macfarlane in his ABC Boyer Lectures in 2006,” Stevens says.

At a time when statements made by the RBA are being heavily scrutinised (the Australian Financial Review runs line-by-line analysis in its editions), Stevens acknowledges this scrutiny and details the research the bank puts into place in putting its monetary policy framework into place.

“The bank carries out a great deal of detailed statistical work, tracking several thousand individual data series. It conducts extensive liaison with businesses and other organisations, usually speaking in detail to as many as 100 contacts each month. It produces voluminous published analysis of these data,” he says.

Stevens stresses the unprecedented set of complex forces facing the Australian economy.

“There is an epochal change occurring, and Australians are also feeling that. It is overwhelmingly positive for us in net terms, even if our tendency to dwell on the downside is more prominently on display at present.

“The future is uncertain.

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