RBA’s Stevens urges realism on rate policy

Under the guidance of Stevens, the RBA oversaw a period of “great stability” in terms of economic growth and inflation.

“Interestingly, while lenders take weeks to pass on any rate cuts to their home loan customers, I wonder how long it takes for the same institutions to reduce the amount of interest they will pay on savings and transaction accounts”.

“Many hard choices will need to be made”, RBA governor Glenn Stevens warned in his farewell speech.

In a measured address, Mr Stevens defended his and the bank’s record over the past decade of keeping inflation within the 2-3 per cent target range on average, while also maintaining economic growth near potential and unemployment between 5-6 per cent.

Underlying inflation slowed to an all-time low of 1.5 per cent in the year to June, well below the RBA’s long run target of 2 to 3 per cent.

“Most of the factors now suppressing inflation are likely to persist, including low wages growth, strong retail competition both domestically and offshore, low commodity prices globally and slow growth in rents as dwelling supply picks up”, he said.

“So for policymakers looking to use low interest rates to boost growth, the question is: which entities, if any, in the economy can accept higher leverage (borrowing) safely?”

Oster said that in Friday last week’s quarterly Statement on Monetary Policy, the RBA “appeared to be much more focused on highlighting the downside risks to the outlook”, particularly in relation to the likely direction and degree of spare capacity in the labor market.

While the RBA says the chances of considering unconventional steps is “very remote”, incoming RBA governor Philip Lowe – who takes the helm next month – has indicated that lowering the rate on its own would lose effectiveness as it approaches 1 percent.

“At a time when the economy could do with the lift that a cut to the cash rate would provide, it was deeply disappointing to hear some of the nation’s largest and most profitable lending institutions announce that only 10 or 13 of the 25 basis point reduction would be passed on to their mortgage customers”, Mr Flavell said.

“Our job is not to avoid all risk; it is to balance the various risks”. Australian households hold debt equal to around 125 per cent of the country’s A$1.6 trillion (S$1.65 trillion) in gross domestic product.

“Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending”, he said.

Non-major lenders amp up the pressure on Australia’s big four banks as they pass on the full benefit of the Reserve Bank’s 0.25 per cent official rate cut to their customers.

“That will occur should there be a moment of crisis, but it would be better if it occurred before then”.