Reserve Bank Governor Testimony
- The Reserve Bank Governor has delivered testimony to the House of Representatives Economics Committee.
- The Governor says that the economy is growing close to trend or average; Inflation is low and unemployment is relatively low; and the global economy is expected to growth at a trend pace. In short, nirvana has been achieved.
- In terms of the Aussie dollar, the Governor noted that “it was a bit on the high side but not dramatically so.” The Governor said the Reserve Bank hadn’t intervened to support a certain level of the currency.
What does it all mean?
- If the Reserve Bank Governor wanted to let us in on a secret, today would have been the day to do it. He didn’t. There were no fresh insights, and no new concerns. Even in terms of the Aussie dollar, the Governor indicated that it was high, but not dramatically so. In an economic sense, some would suggest that it was all a bit boring.
- But it is a good form of boring; a form of boring that can assure businesses and consumers. In fact the Governor believes our economy is as good now as it has ever been. That view is certainly not new as the Governor has been trying to get the community to see the glass as “half full” rather than “half empty”.
- That doesn’t mean that there are no risks ahead – there always are. But the Reserve Bank Governor believes we are in a happy place.
- The bottom line is that interest rates won’t be changing any time soon. That is, provided that there are no fresh shocks in Europe.
Key aspects of the testimony
- The messages were the same. European leaders have a lot of challenges in front of them. In the US, growth is OK, but not great. In China, more sustainable economic growth is occurring.
- The world economy is OK. “The kind of growth envisaged for the world as a whole is close to its long-run average.”
- Europe has a lot of work to do. “Realistically, it will be quite some time before the Europeans will be able to say these problems have been put behind them, even if things go well.”
- In Australia, the economy is in good shape. “Looking back, then, the economy appears to have been recording reasonable overall growth, relatively low unemployment, and low inflation.”
- Looking ahead, the economy is expected to remain in good shape, although the composition of growth may change. “Overall, growth is forecast still to be close to trend, albeit with a different composition from that seen in the past year or two, and inflation consistent with the target.”
- The Governor sees a peaking of the construction phase of the mining boom, with production taking the reins thereafter. And then there may be a shift from mining to domestic building as a growth driver. “Looking ahead, the peak of the resource investment boom as share of GDP – the highest such peak in at least a century – will occur within the next year or two. After that the rate of resource investment is likely to decline, while the export shipments of the resources themselves will pick up. By then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might be starting to pick up.”
- Interest rates? The Governor is waiting to see what happens as a result of recent rate cuts. “It is too early to tell how much difference the sequence of decisions to lower interest rates late last year and in the middle of this year has made to the economy, though we can observe that dwelling prices may have stopped their earlier gentle decline, and business credit has been growing at its fastest pace for three years.”
- Questions & answers. Glenn Stevens said we (collectively Australians) needed to “get real” about home prices, and we have. That is, we had to realise that home prices don’t always go up, and go up significantly. He said we came to that realisation a few years ago.
- Stevens again rejected suggestions that bank profits were too high or that there wasn’t enough competition. Competition for deposits was strong. And return on equity for the banking sector was similar to other listed companies.
- Stevens said that he had not changed his mind on the mining boom. He had always expected the construction phase to end around 2013-2014 and that appears on track. He said that we have come through the boom without a jump in inflation and he believes that we will come through it without a slump in the economy at the end.
- Stevens also said that the RBA had not seen anything that would cause it to materially change its view on the pipeline of resource projects.
- Stevens rejected suggestions that there was currently a greater variation in economic performance across regions than in the past. He said that the economy had always been a “patchwork” and was surprised that variability in economic performance wasn’t actually bigger.
- Stevens was asked about the Aussie dollar. He said that “it was a bit on the high side but not dramatically so.” He also noted that “it is probably at present trading a bit above what I thought it would be on the basis of past relationships…”
- Assistant Governor Lowe described the new co-operation between central banks and governments in Europe as a “dance” and noted that they were “gradually moving in the right direction.” Inflation wasn’t a problem in Europe as banks were content to leave money with central banks at present rather than lend it out.
What is the importance of the economic data?
- The Reserve Bank Governor testifies to the House of Representatives Economics Committee twice a year.
What are the implications for interest rates and investors?
- The Reserve Bank maintains an easing bias, but it is by no means explicit. While we are pencilling in a rate cut near the end of the year, it is more a risk, not a definite forecast.
- The Reserve Bank isn’t unduly worried about the Aussie dollar at present, but it is on the radar screen. If the Aussie was to rise markedly from here, we believe that this would increase the chance of a rate cut.