RBA Governor says growth could be higher. It’s not just about interest rates


RBA Governor’s Testimony – August 2014

  • The Governor’s opening statement forecast that growth of 2‑3%pa is the most likely outcome for 2014/15 and inflation to remain consistent with the 2% to 3% target.
  • Economic growth could be higher but there are significant forces restraining activity.
  • There are signs of a pick‑up in non‑mining investment but investment intentions are mixed and dependent on the domestic growth outlook. Australians have become more risk averse since the GFC.
  • The unemployment rate could stay near present levels and not fall significantly until 2016.
  • The AUD remains high because of comparatively attractive yields in Australia. The USD is unusually weak. The RBA is not keen on market intervention to weaken the AUD.

RBA Governor Stevens and other officials appeared before the House Economics Committee in Brisbane this morning.  While the recent Statement on Monetary Policy (SMP) seemed to emphasise the downside risks to growth, the Governor was a touch more positive yesterday. The Governor was willing to contemplate some upside growth risks and noted that recent forecast changes didn’t really indicate a shift in thinking. Assistant Governor Kent muddied the waters a little by suggesting that the labour market outlook was little changed from earlier thinking as well, with a turning point in unemployment a little sooner than suggested in the SMP. The comment certainly suggests a reluctance to cut rates. But equally, the Governor made it clear that the RBA had not thought about raising rates lately.

The opening statement repeated some of the themes evident in the detailed media interviews and speeches in recent months. Namely, in terms of the world economy, growth is continuing at a “moderate pace”.  Importantly for Australia, major trading partner growth is running around its long‑run average rate.  China’s growth has been close to the official target of 7.5%.  The Governor noted the low volatility across global financial prices which is partly a reflection of the “exceptional” accommodative monetary policy that has been conducted across the world.

In terms of the Australian economy, GDP growth looks set to be between 2% and 3% in 2014/15 which is below its trend rate. The forces restraining growth are well known. The current fall in mining investment could be a bit larger than previously expected. The Australian dollar (AUD) remains relatively high, especially when compared to the level and direction of bulk commodity export prices. The USD, unusually, appears to be relatively weak given its firming growth and interest rate outlooks. Consumer spending is unlikely to lift significantly and could rise in line with modest income growth.

Offsetting these domestic weaknesses there is clear evidence of stronger activity in the interest‑rate‑sensitive areas like housing and other construction. The labour market reflects the conflicting forces in the real economy. The RBA expects the unemployment rate to stay high for a considerable period, until 2016. June quarter GDP growth is likely to be relatively weak compared to the strong QI figure.

The Governor’s testimony indicates that other issues, besides monetary policy, are holding growth back from its potential rate. Namely, a consistent and sustained lift in business confidence is required which would lead to higher non‑mining business investment. The shift to more risk aversion by households and business restrains economic growth.

The unemployment rate could stay near present levels until well into 2016. While forward indicators are positive there are other issues, like strong population growth, which impede a marked reduction in the unemployment rate.The highlights of the Q&A session include:

  •  The high AUD reflects strong inflows of capital seeking higher yields, as well as a weak USD.
  •  The RBA is keeping direct currency intervention as “part of the toolkit”.  So far, the Governor believes that it was been the “right call” not to intervene in the currency market.
  •  Low wages growth is a product of elevated job concerns but it will help the economy adjust to a more competitive position and support jobs growth.
  •  Productivity trends appear to be improving but more efforts are required to replicate the 1990s gains.
  •  The RBA’s inflation target has a priority in policy deliberations over the setting of the cash rate.

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