Glenn Stevens just warned the RBA is running out of room to make a difference in the economy


RBA Governor Glenn Stevens is at the American Chamber of Commerce in Australia this afternoon. In his opening remark Stevens came as close as we’re ever likely to see to saying that the RBA can’t cure everything that ails the Australian economy.

Governor Stevens said that in the wake of the mining investment boom the economy is experiencing a “drag on demand” which the RBA hopes will be offset by “other sources of demand.” But he notes he’d like them to “speed up and help make a difference.”

But what’s most telling about his opening remarks and another pointer that the RBA is rapidly approaching what it thinks might be the lower bound of monetary policy efficacy Stevens said:

I’ve talked a lot about this before so I won’t labour the point. It is a major transition. We can hope to assist it, and the Reserve Bank is doing that, and will continue to lend what support it can, within the limits of its powers and consistent with its mandate. The decline in the exchange rate is assisting the transition (as it assisted in absorbing the earlier phase of the mining boom). But we have always said we cannot hope to fine-tune this transition, however much we may wish otherwise.

When this comment is read in conjunction with the comment in the RBA Minutes released earlier this week which said the board “noted the greater degree of uncertainty about the behaviour of borrowers and savers in a world of very low interest rates” it’s a clear sign that other things need to be done to get the economy moving forward.

Things like restoring confidence to business and consumers.

Governor Stevens did note that Australia has got lucky so far and he was positive about the economic prospects of the nation:

Looking back at the history of such episodes, of which there have been a few over the past century or more, if we come through this terms of trade event with neither a major outbreak of inflation in the upswing nor a major crash in the downswing, even if we have a period of sub-average growth in the process, we will have done far, far better than in any previous event of this kind, let alone one of this magnitude. I still think that is the most likely outcome.

Both this comment and the one about monetary policy effectiveness suggest Stevens wants to pass the baton on, beyond the RBA.

Perhaps that’s why the Prime Minister has gone soft on the budget emergency rhetoric and recognises now that a government he leads is unlikely to ever deliver a surplus.

Time, and the next budget will tell.