At the outset of his speech this morning Reserve Bank boss Glenn Stevens said “ahead of next week’s meeting of the Reserve Bank Board, I have no comments to offer today on monetary policy.”
While his talk was mainly about the financial system he did break away near the end to give a very strong hint that he and his colleagues at the RBA are now viewing the risks to the economy that flow from super low rates.
That’s a huge departure from what has always been assumed as the RBA’s standard operating procedure — low rates are good because they put more money in the hands of borrowers.
Echoing comments contained in the RBA Board minutes from last week that members of the Board noted “the responsiveness of borrowers and savers to changes in interest rates and asset prices was unusually uncertain in a world of very low interest rates and high household leverage,” Governor Stevens said this morning:
The key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets are so low? This is a global question. Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot. Those seeking to make that purchase now – that is, those on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago. They have to accept a lot more risk to generate the expected flow of future income they want.
Monetary policy isn’t just about borrowing costs anymore.
That’s a game changer and a huge hint that even if the RBA cuts rates again on May 5 that will be the end of this cycle.