Curve Daily Commentary, April 21 2015

Stevens Cuts to the Chase in New York


In addressing the American Australian Association luncheon in the US overnight, RBA Governor Glenn Stevens delivered a very timely speech titled ‘The World Economy and Australia’. The speech is very much worth a read and can be found here, with particular focus on the Australian component which we touch on below. 

Stevens reiterated that the Board remained open to further cuts, however, was realistic on how much more heavy lifting monetary policy could achieve, saying:

  The Board has, moreover, clearly signalled a willingness to lower it even further, should that be helpful in securing sustainable economic growth. The Board has been proceeding with a degree of caution that is appropriate in the circumstances. It also has, I would say, a realistic assessment of how much monetary policy can be expected to achieve in supporting the adjustment the economy needs to make.

Further to this he added:

Any help in boosting sustainable growth from other policies would, of course, be welcome. In particular, things that could credibly be seen as lifting prospects for future income, and increasing confidence in those prospects, would give easy monetary policy a good deal more traction.

As far as other policy options that could work alongside monetary policy growth, he was referring to the G20s commitment to implement policy changes with the goal if lifting global growth by 2 percent over 5 years. With one year of the five years now passed he said that it would be a good time to reflect on what has been done to date. Of course it is not only those G20 reforms thatRBA Cash Target can work alongside monetary policy, with fiscal policy also coming under the spotlight. With this years budget announcement only weeks away, the Governor served up a dose of reality for the government, and both sides of politics for that matter, saying

On the fiscal front, the government has little choice but to accept the slower path of deficit reduction over the near term. But over the longer term, hard thinking still needs to occur about the persistent gap we are likely to see (under current policy settings) between the government’s permanent income via taxes and its permanent spending on the provision of good and services

This address from the governor, building on the ongoing narrative from the RBA, continues to suggest that the RBA is quickly reaching the point where they can do no more to support growth. The RBA is also acutely aware that increased leverage is not the solution to the current weakness in domestic demand and that housing prices are starting to look stretched, especially in Sydney where Stevens said “it is hard to escape the conclusion that Sydney prices – up by a third since 2012 – look rather exuberant”.

When combined with some positive data from the NAB business survey and employment statistics last week, you get the feeling that a May rate cut is not a foregone conclusion and that if we aren’t already at the bottom of the interest rate cycle, we are getting close, with a move in the cash rate below 2.00% looking less and less likely.