Is Monetary Policy Reaching Its Limit in Australia?

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RBA Governor Glenn Stevens this morning noted that the Board had an open mind to further interest rate cuts if necessary. But the message that market economists and strategists seem to have heard was that monetary policy might be reaching the limits of its efficacy.

ANZ economist Riki Polygenis noted the focus that the Governor put on “other policies” highlight the Governor’s view that “pro-growth, pro-productivity, confidence-building reforms” are what’s needed to get businesses to invest, innovate, become more productive and avoid unnecessary costs.

If Australia can do that, then it can experience above-trend growth once again.

On a similar theme, Michael Workman from the Commonwealth Bank noted, “Stevens says it’s not just about interest rates”, focussing instead on “pro-growth … confidence building” economic reforms.

Governor Stevens is clearly signalling that monetary policy can’t do all the heavy lifting, and Government and policy needs to play a role in getting the Australian economy moving.

In the context of the questioning from the Committee – which Annette Beacher of TD Securities said had “way too much focus on the capital injection into the RBA’s reserve fund in the first hour” and not enough on interest rates or the economic future of Australia – it seems Governor Stevens is going to have to keep making the point that monetary policy can’t do it alone.

In the end though a more optimistic RBA which believes further interest rate cuts won’t make a big difference means rates are likely to be on hold in Australia for a while yet.

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