RBA Governor Glenn Stevens has just delivered a very sober message to to the House of Representatives Standing Committee on Economics but in it there are clear signs, once again, that he believes monetary policy is doing its job and gaining traction through out the economy.
Of course the challenge of Australian growth operating “below trend for a while, within the 2-3% range” continues as mining investment drops off and domestic demand, homebuying and consumer spending are just starting to rise once more, albeit slowly for the latter.
But for all the natural caution that the Governor exhibits over the economic outlook there is clear evidence of hope. From his speech:
Putting all this together, our expectation is that the below-trend growth in GDP we have seen for a while now will probably continue for a bit longer yet. Over the more medium term, there are good grounds to think that growth can strengthen.
Eventually more capital spending will be required in some of those sectors where it is very low at present.
The corporate sector in aggregate has high reserves of cash, financial intermediaries and capital markets are willing to lend, and interest rates are low.
If the nascent improvement in ‘confidence’ we have seen can be sustained, that will help to achieve better growth. In fact, we could aspire to a period during which growth could be a bit above trend for a while, since spare capacity in the economy has increased a bit over the past eighteen months or so.
Above-trend growth would be nice and might help fix part of the budget hole the Government told us about in the MYEFO yesterday.
Stevens also noted monetary policy was able to be kept low because inflation was low and that the Australian dollar has, “behaved, of late, more as might be expected in such circumstances: that is, it has declined.”
And while the Governor did not close off the potential for further rate cuts if required he noted: “Low interest rates are doing the sorts of things we expect them to do … there are few serious claims that the cost of borrowing per se is holding back growth.
“On the contrary, monetary policy is supporting higher spending by altering incentives as between spending and saving, and working to create an environment in asset and credit markets that eases the restraints on some sorts of activity.”
On the negative side, it is worth highlighting though is that Governor Stevens has again questioned the belief that Australian growth would persist ad infinitum and that borrowing had little risk had to be and was now being questioned.
Notwithstanding this warning, as Australia heads into 2014, the Governor appears to be cautiously optimistic about the future.