RBA Governor Glenn Stevens last night used his speech to an event hosted by Goldman Sachs to deliver a blunt message to politicians both at home and abroad about the limits of monetary policy in delivering durable and sustainable increase in global growth.
In a speech entitled The World Economy and Australia to the the American Australian Association luncheon in new York, Stevens again reiterated his belief that “too much weight is being put on monetary policy to try to achieve what it can’t: a durable and sustainable increase in growth, in an environment where private leverage is already rather high or even too high”.
Reflecting on the goal set by by G20 leaders last year in Australia to increase global GDP by an additional 2% over the next five years, Stevens used his moment on the global stage to place pressure back on politicians to make good on that intent. He said:
“It will be important this year, after one of the five years has passed, to see whether we are all making good on our various promises. More generally, actions which promote entrepreneurship, innovation, adaptation and skill-building, that reward ‘real’ risk-taking, while providing a stable macroeconomic environment and a well-functioning financial system, will best support our future wellbeing”.
In other words, he would like to see some action to back up those goals set last year.
Stevens indicated that there was potentially more work for monetary policy to do domestically as the economy continues its transition after the mining investment boom.
In the case of monetary policy, the Reserve Bank has been offering support to demand, consistent with its mandate as expressed by the medium-term inflation target. Relevant considerations of late include the fact that output is below conventional estimates of ‘potential’, aggregate demand still seems on the soft side as resources investment falls sharply, and unemployment is elevated and above most estimates of ‘natural rates’ or ‘NAIRUs’. And inflation is forecast to be consistent with the 2–3 per cent target. So interest rates should be quite accommodative and the question of whether they should be reduced further has to be on the table.
That is, while the outlook for Australian interest rates remains “lower for longer”, the question of whether they should be cut further “has to be on the table”.
While this is nothing the market didn’t already know – the RBA have had an implicit easing bias since they cut interest rates in February – after reading Stevens’ speech several times you can’t help but get the feeling that if they do indeed cut rates further it will be reluctantly.
High domestic household leverage, something that may may limit the ability of households to bring forward future spending should interest rates be cut further, along with the sharp rise in Sydney property prices in response to past policy easing – something he describes as looking “rather exuberant” – were two examples within his speech that suggest this is the case.
Indeed, as Stevens’ put it, “while the conduct of monetary policy can’t allow these financial considerations to dominate the ‘real economy’ ones completely, nor can it simply ignore them. A balance has to be found.”. This, along with doubts over “how much monetary policy can be expected to achieve in supporting the adjustment the economy needs to make”, suggests, based on his line of thinking, that a sub 2% cash rate this year is unlikely this year.
While Stevens is expressing doubts money markets continue to bet that they will. A 25bps cut in May to 2.0% is seen at 67%. A cash rate of 1.75% is fully priced for November.
Perhaps, based on what they’ve seen in the post financial crisis era, they understand the odds of meaningful action from politicians to help bolster growth are considerably less.