ANZ: Stevens' Caution On Growth Signals Rates Will Be On Hold Until 2015

Reserve Bank Governor Glenn Stevens’ Speech this afternoon was an important opportunity to clarify thinking about the economy, especially after the RBA meeting and statement earlier this week.

ANZ believes the caution shown by Stevens is a signal rates are on hold ’till at least 2015.

The bank noted the RBA “seems cautiously optimistic that the economy is improving, that the necessary handover or transition in growth is beginning, although the recovery is still fragile.”

What was striking in the speech (which ANZ has picked up on) is the real concern Stevens showed about whether or not Australia might just slip into a mild recession before the handover from mining investment-lead growth to something much broader (emphasis added).

On the transition away from mining-led growth Stevens noted that “if we manage to absorb the upward phase of the biggest terms of trade boom in more than a century without overheating, and the downward phase without a slump, that would be a major achievement.” He then goes on to note that there are promising early signs that the transition to non-mining sources of growth is beginning to occur, but that “it is far too soon to think about counting any chickens yet”. This suggests that the Bank remains particularly uncertain about the handover and the emerging recovery in the non-mining economy.

Stevens also makes the point that “the capacity to fine-tune these outcomes is very limited”, which likely alludes not only to the RBA’s uncertainty about the handover but also the possibility of some weak quarters of GDP over the next year or so. The RBA seems concerned that there may be an especially weak quarter or two for GDP if mining investment (which is likely to be quite volatile going forward) declines especially sharply, while other sectors of the economy remain subdued.

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