STEVENS: Rates Will Stay On Hold, And The Low Rate Is Working

RBA Governor Stevens is appearing before the House of Representatives Standing Committee on Economics in Sydney this morning and has just presented his initial remarks.

Given that we have heard from the RBA already this week after the board meeting and via the statement on monetary policy just a month ago, there is not too many surprises in his remarks.

But traders will be interested in the governor’s assessment of the strong GDP and retail sales data that have been released since Stevens’ statement on Tuesday.

On GDP, Stevens noted:

“Turning to the Australian economy, for some time our view has been that growth has been running below its trend pace. The national accounts released a couple of days ago don’t significantly change that assessment.”

Stevens noted that this growth was in line with expectations but that growth drivers were shifting. On recent Capex data, he said that “the very high level of investment spending by mining companies has turned down, and the decline will accelerate over the coming year.”

Other areas of the economy will provide some offset and he talked about the volume impact from mines coming online which would lead to exports “growing strongly”.

In terms of the strong retail sales data released yesterday, Stevens noted that, “consumer demand lifted over summer” but that “consumer sentiment does still seem a little skittish”.

More tellingly though was Stevens’ comment that “while we expect consumption spending to grow in line with income or perhaps a little faster, consumers are unlikely to be the drivers of growth that they were prior to the financial crisis.”

In terms of the other sectors of the economy expected to take up some of the mining slack, Stevens noted that building approvals were increasingly strongly and that there had been “almost 50,000” approvals over the past 3 months. That’s an increase of “about 27 per cent from the figures of a year earlier, and is the highest three-month total in the 30-year history of this series.”

That is hard to square with the AiG HIA performance of construction index released today, which might help explain why his tone remained cautious. He noted that while monetary policy was working as it should, and while the pre-conditions for improved business confidence and investments were coming into place, there are still many uncertainties.

Indeed in closing he asked the question “will the additional demand likely to be generated outside mining as a result of these trends be just the right amount to offset the large decline in mining investment spending, so keeping the economy near full employment?”

It is a difficult one and, in a signal perhaps to the Government and its fiscal stance, or perhaps to Aussie dollar traders who still have the Aussie “high by historical standards” Stevens said:

Even if it were possible for forecasts to be much more accurate than experience could possibly lead us to hope, it could not be assumed that a shortfall in demand could necessarily be made good in short order by monetary policy. Monetary policy can have a powerful effect on the general environment, but it cannot hope to fine-tune the quarterly or even annual path of aggregate demand.

The result of all this is that Stevens has signalled that for the moment there is “the likelihood, if the economy evolves more or less as expected, of a period of stability in the cash rate.” But peppered throughout his opening address is the message that while monetary policy can’t do everything on its own it is working.

Now for the questions from the committee – they’re always the fun parts.

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