Glenn Stevens: Further interest rates cuts are on the table

Reserve Bank Governor Glenn Stevens. William West/Getty Images

RBA governor Glenn Stevens has left the door open to further cuts in official cash rates but warns that longer term risks need to be considered.

“The question of whether they might be reduced further remains, as I have said before, on the table,” he told an Anika Foundation Luncheon in Sydney.

Stevens was reflecting on the challenges facing policymakers and how to foster sustainable levels of growth over the longer term.

“It 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,” he said.

“Monetary policy works partly by prompting risk-taking behaviour. In some ways that is good: in some respects, there has not been enough risk-taking behaviour.”

To Stevens, the increased attention high-frequency data is creating the risk that policymakers, in turn, begin to adjust monetary policy for short-term needs as well.

While Stevens suggests that current metrics don’t suggest that interest rates have reached a level that is fostering dangerous forms of risk-taking, it certainly appears that the bar to cutting interest rates further is moving higher.

Unless that trend reverses and the economy fails to accelerate, as the RBA and Treasury expect, it’s unlikely that the RBA will opt to reduce interest rates further given already-heightened concerns about the greatest source of domestic household wealth, Australia’s east coast property market.

The full speech can be found here.

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