Reserve Bank of Australia governor Glenn Stevens has warned that interest rate cuts may not have the same impact on growth as in the past.
Reserve Bank of Australia governor Glenn Stevens has warned that interest rate cuts may not have the same impact on growth as in the past.
Addressing the federal House of Representatives economic committee today, he said the central bank board is conscious of the possibility that monetary policy's power to summon up additional growth in demand could - at current levels of interest rates - be less than it was in the past.
He said a decade ago when there was a desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy.
"Today, such a channel may be less effective," he said in his opening statement.
However, Mr Stevens did not believe that monetary policy has reached the point where it has no ability at all to give additional support to demand.
"Our judgment is that it still has some ability to assist the transition the economy is making, and we regarded it as appropriate to provide that support," he said.
The RBA cut the cash rate for the first time in 18 months last week to an all time low of 2.25 per cent.
He said the bank's forecasts also released last week in its quarterly monetary policy statement assume a lower path for interest rates and a lower exchange rate than previously and the ones the board responded to at this month's board meeting.
"These are assumptions rather than forecasts or commitments to a course of action," Mr Stevens said.
He said falls in prices for key export commodities are lowering Australia's terms of trade and the purchasing power of our national income.
"It will continue to constrain income growth for households and mining companies, and revenues for both state and federal governments, over the period ahead," Mr Stevens said.
He said the downswing in capital spending by the resources sector is likely to accelerate this year, as previously forecast.
"The recent declines in commodity prices don't change it, though they do reinforce that this trend is well and truly under way," he said.
He said the lower exchange rate is likely to help export volumes outside the resources sector, noting better trends in some services export categories including tourism and education.
House price increases in Sydney are very strong and pretty solid in Melbourne but are much more mixed elsewhere.
Mr Stevens said excluding Sydney, the rise for Australia as a whole over the past year was about five per cent, a healthy pace but not alarming.
But developments in the Sydney market remain concerning.
"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," he said.
He welcomed steps by regulators to manage potential risks posed by the rise in lending to investors in housing.
