SYDNEY: Australia's central bank chief said on Wednesday that record low interest rates alone cannot drive confidence or spur business activity, suggesting that firms should do more to stimulate stronger economic growth.
Reserve Bank of Australia Governor Glenn Stevens told lawmakers at his semi-annual testimony the economy now needs 'animal spirits' in order to support an expansion of non-mining firms, and this is not what monetary policy can directly do.
"We need an environment where there is more confidence to move ahead. I've allowed the horse to come to the water of cheap funding, but I can't make it drink," Stevens said.
"It isn't that I'm unwilling to consider lower rates if that really would be helpful but it is just a sense that interest rates aren't the answer at the moment," he told the House of Representatives Standing Committee on Economics.
His comments led markets to pare back the probability of a cut in rates anytime soon, with a move by December now put at no more than a one-in-four chance.
Stevens conceded that it is "pretty normal" at this point of the economic cycle that companies may be reluctant to expand due to uncertainty about the future pace of demand. But that should change over time, he said, citing low funding costs, a hefty rise in household net worth, strong population growth and opportunities to tap Asia's expanding middle class.
When it does, the central bank's forecasts for sub-par growth "will very likely prove to be conservative", Stevens said. In its quarterly monetary policy report released earlier this month, the Reserve Bank of Australia (RBA) said it expected the economy to grow at a below-potential 2.5 percent pace by December this year, down from around 2.7 percent for 2013. It saw the slowdown in mining investments deepening.
STEADY AND STABLE
For now, the central bank will let the current stimulatory policy setting do its job, Stevens said. Earlier this month, the RBA left the cash rate unchanged at 2.5 percent, marking a full year of steady rates.
"The Board has been mindful of allowing time for measures already taken to have their effects, and of the very considerable limitations for monetary policy in fine-tuning economic outcomes over short periods," Stevens said.
"It has also seen some value, in the present circumstances, in maintaining a sense of steadiness and stability." On the Australian dollar, Stevens was asked if he still thought the high exchange rate will fall significantly at some point.
"It would remain my view that the risk that it goes down materially at some point is being under appreciated," he said.
JPMorgan chief economist Stephen Walters said the take away message is that there will be an extended period of steady rates.
"We believe it would take a lot for the Bank to shimmy towards a move in the policy rate in either direction, with the most likely outcome being the RBA staying inactive for another year," Walters said.
"Indeed, we retain our forecast that there will be no further reductions in the cash rate in this cycle, but that the first rate hike is likely to be delayed until 3Q 2015."
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