Wednesday, February 10, 2010

Low interest rates as far as the eye can see - Glenn Stevens

It'd cut the Coalition's ground from under it

The head of the Reserve Bank has held out the prospect of low interest rates as far as the eye can see, saying monetary policy should "remain more accommodative than otherwise" so long as Labor sticks to its pledge to restrain spending.

Explicitly acknowledging the link between government spending and interest rates claimed by the Coalition, Glenn Stevens told a closed symposium in Sydney to expect "a lengthly period of rather low short-term interest rates" if governments commit themselves to fiscal repair.

Speaking to central bankers from around the world gathered to celebrate the Reserve Bank's 50th birthday Governor Stephens asked rhetorically how monetary policy should respond if governments restrained spending to pay off debts creating a drag on economic growth.

"The straightforward answer is presumably that it would remain more accommodative than otherwise," he said...

He noted that there may well be "attractions" for governments in restraining spending for precisely this reason. It would make it cheaper to pay off their debts and keep interest rates low for private borrowers as the economy recovered.

Coalition Treasury spokesman Joe Hockey said the speech was "a complete endorsement of everything we have been saying".

"We've been saying for months and months now that government spending puts upward pressure on interest rates. The Governor has confirmed it emphatically in this briefing to global central bankers."

"It is obvious the government now needs to pull back on its massive spending program."

The government has already promised to hold real spending growth to 2 per cent per year once economic growth returns to trend, and to hold it there during the five or so years it will take to return the budget gets to surplus.

Mr Hockey said the Governor's words showed it needed to go further. "Mr Stevens refers to what would happen if there was 'relatively rapid fiscal consolidation' If its not rapid that means rate rises are the government's fault."

But while holding open the prospect of a long period of low interest rates Governor Stevens also indicated that the thought disturbed him.

"If it continued after the financial sector repair had largely been completed, it would raise its own set of questions about financial stability," he told the governors.

Suggesting that in future the setting of interest rates might to take account their effect on instability as well as inflation he asked "whether monetary policy can plausibly escape any responsibility" for helping to create booms and busts.

He said until recently it was thought central banks should do no more than "clean up after" busts.

Mr Stephens told the governors he suspected they had a moral duty to do more, and to target excessive growth of asset prices and debt and risk-taking as they became apparent.

"This amounts to an argument to err on the side, much earlier in the process, of not keeping interest rates unusually low," he said.

Such an approach might require a rewriting of the agreement between the Governor and the Treasurer which at the moment requires the Bank to focus on consumer rather than asset price inflation.

Mr Stevens speech included the disclaimer that it was "not intended to provide any particular message about current issues for monetary policy in Australia".

A spokesman for the Treasurer, Wayne Swan, said Mr Stevens was "clearly and expressly discussing the situation relating to governments around the world which have dramatically higher debt levels than Australia. "Governor Stevens has clearly said he is very comfortable with the government's fiscal position," he said.

Published in today's SMH

Fifty Years of Monetary Policy What Have We Learned

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