The Reserve Bank has admitted concerns that low rates may have lost their firepower, following the board’s decision earlier this month to cut the official interest rate by a further 25 basis points.
Addressing the House of Representatives Standing Committee on Economics on Friday, governor Glenn Stevens
said that the Board is “very conscious” of the possibility that monetary policy's power to stimulate growth in demand wouldn’t be as effective as it has been in the past.
“A decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy,” he said. “Today, such a channel may be less effective.”
However, Stevens does not believe that monetary policy has reached the point where it has no ability at all to boost demand, and argued that a further cut was necessary in the current environment.
“At its meeting in February the Board considered that this revised assessment – that is, sub-trend growth for longer, a higher peak in the unemployment rate, slightly lower inflation – warranted consideration of some further adjustment to monetary policy, after a fairly long period during which the cash rate had remained steady,” he said.
Easing concerns that a lower interest rate environment may have sinister repercussions on the housing market, Stevens said the rise in house prices were “not alarming”.
“Excluding Sydney, the rise for Australia as a whole over the past year was about 5%. That is a healthy pace but not alarming, and some cities have seen price falls.
“Developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds.”
However, he noted that the central bank has been in discussion with APRA
over managing potential risks in the housing sector – which would involved more intense scrutiny of investor loan portfolios growing at over 10%, with the possibility of additional capital being required if APRA
deems it necessary.
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