Tuesday, September 09, 2008

The thoughts of Governor Stevens

On the two interest rate rises earlier this year:

“I don’t think they were unnecessary. I think they had to be done.”

On rate cuts to come:

“I can’t come here and precommit or make a forecast about what the board’s going to do in forthcoming meetings.”

On recession:

“I think it would be dishonest to deny that there’s any possibility at all of recession. There's clearly some probability of that.”

On working families:

“I think it’s been tough for many of them, particularly those that are indebted.”

On the banks:

“To be frank I think it is unlikely that the banks will volunteer reductions in loan rates independently of the Reserve Bank lowering the cash rate.”

Details follow...

Australia’s Reserve Bank Governor has evoked the concept of a recession while warning that Australia’s unemployment rate is set to increase to well above 5%, adding an extra 100,000 people to the unemployment queue.

In his first appearance before the parliament’s economics committee since cutting interest rates by 0.25 per cent last week Governor Glenn Stevens said the banks; future decisions would be about whether to cut rates further, not whether to raise them.

“We have moved from a phase where the question was whether we had done enough to make sure inflation will come down over time, to one where the question will be whether we hold rates here or go down even more,” he told the Melbourne committee.

Asked whether the Reserve would be cutting rates again Mr Stevens replied that he did not want to pre-empt decisions to be made by his board, adding that the financial markets had priced in further cuts and that he had “no particular agenda to either dissuade them or encourage them any further”.

Although inflation would continue to rise, the battle to contain it had been won. It would begin falling within six months after peaking at 5%.

The challenge for the Bank would be to ensure that it brought about a soft rather than a hard landing.

“I think it would be dishonest to deny that there is any possibility at all of recession,” the Governor said.

“There is clearly some probability of that.”

“The risk of recession is not zero, but the most likely outcome is a gradual slowdown.”

Australia’s unemployment rate, at present 4.3%, should begin climbing within months.

Asked how high it would climb the Governor replied that Australia’s economic situation was similar to the “mid-cycle pause” of 2001.

“In that episode the rate of unemployment rose by a percentage point or so over the next year to 18 months,” he said.

An increase in Australia’s rate of unemployment from 4.3% to 5.3% would add more than 100,000 Australians to the unemployment queue, boosting the number of unemployed from 471,000 to around 600,000.

The number of Australians with jobs would continue to climb, although much more slowly than the number of people wanting work.

As the Governor addressed the committee the ANZ Bank revealed that its survey of job advertisements had recorded its biggest monthly side since 2001, collapsing 4.9% nationwide and by 7% in Victoria.

The Dunn and Bradstreet survey showed that business executives expected conditions to decline further in the December quarter.

The Governor said that consumer and business confidence had not “collapsed” but was merely low.

“What I would say about the Reserve Bank board is that these people that are pretty well plugged in to the business community, and I have not heard them speak of a collapse in confidence at all, in any of the discussions we have had, he told the committee.

“Perhaps they should get out more, Governor,” Steven Ciobo, the Opposition's small business spokesman said.

"I think they get around a fair bit," Stevens shot back.

The Governor said that Australian businesses appeared to have “enough confidence to have planned an enormous upgrade in investment spending.”

“I suspect that not all that investment will get done. It probably can’t get done actually. It would be too much for the economy to handle. But top me those plans do not seem consistent with a collapse in confidence.”

Told of a survey that rated Australian consumer confidence the second-lowest in the Governor said he did not think that was right.

“I myself think there are grounds for a fair bit more confidence in Australia than there are in the US, the UK or in most of mainland Europe,” he told the committee.

Mr Stevens said that in one respect the US sub-prime mortgage crisis had been good for Australia. It stopped the same sort of thing happening here.

“Some fringe players in the Australian mortgage market had lending standards not as bad as in the US, but they were prepared to take more risk.”

“Had this gone on for five more years we would have had more such lending.”

“I suppose it is in some way fortunate for Australia that US lending standards fell over when they did from that point of view,” he said.

While some Australian banks would be able to cut their rates independently of the Reserve Bank, he was not expecting them to.

“It's their call, but it doesn't strike me as likely,” the Governor said.

The reserve Bank Governor Glenn Stevens has nominated 3% as Australia’s economic speed limit telling the Parliament’s economics committee that demand growth faster than that is not sustainable.

“The economy’s potential to supply things probably rises at about 3 pc per annum,’ he told the biannual committee hearing in Melbourne.

“If demand is rising at 4% or 5% or 6% as at various years it has, sooner or later you are going to reach the point where you are stretching that supply capacity.”

“You want to grow above trend to use up the capacity when it is idle, but once you’ve done that you have to slow it down to the economy’s medium term growth in potential supply.

“It has to have a ‘3’ in front of it. You can’t have demand growth of 5% without a problem on inflation.”

Non farm economic growth had slowed to an annualised pace of about 2%.

“Our feeling is still that the low point will be lower than that. You can’t grow above average indefinitely,” he told the committee.

Economic growth was slowing rather than turning negative, and its composition had changed.

“Household consumption is probably a little weaker, investment is a little stronger and public spending is a little stronger than we had assumed some months back.

“GDP growth is if anything slightly higher than it seemed as if it would be some months back, although I think we’ll still get to the same low point in growth. “

“Maybe it will take a quarter or two longer than it would have.”

The Reserve Bank was reacting to the impending slowdown by cutting interest rates ahead of time.

“If you want to change lanes in you car you apply a bit of steering, but once you are heading in the right direction you straighten up,” the Governor said.

“If the economy is slowing you don’t push it down and down.”

“If you wait for the your target to be evidentially achieved before starting some adjustment you have waited too long.”

Mr Stevens said the global slowdown would on balance be good for Australia.

“At this point we would be considering the below average growth in the world economy - not a complete crash - quite helpful for dampening prices.”

He did not expect the slowdown to have too much effect on China.

“It is true that Chinese economic growth is slowing somewhat. They wanted to slow and they have done it because there has been evidence of overheating.”

But the resources that Australia sold China would continue to be in demand.

“If you visit China you will see the iron ore we sell in the enormous infrastructure that they are building.”

“My guess is they will continue to do that for some time, and if the economy slows too much they will adjust things and speed it up.”

The Governor said that this did not necessarily mean that commodity prices would climb further. Metal prices had already fallen and spot prices for coal were coming down.

Tim Colebatch: Glenn Stevens makes an unlikely optimist.