Australian rates will not go to zero

AUSTRALIA is unlikely to follow Europe and the United States and slash its official interest rate to near zero to help prop up the struggling economy, the central bank governor said Friday.

The Reserve Bank of Australia (RBA) eased the official cash rate to record low of 2.25 percent last week and more cuts are tipped but Glenn Stevens said a near-zero figure or vast bond-buying — known as quantitative easing — was unlikely.

“I don’t think that we will end in that position,” he told a House of Representatives economics committee.

“Nobody can be 100 percent sure of these things, obviously, but I would very much hope we don’t.”

As a decade-long mining investment boom fades, Australian growth has slowed, inflation is low and unemployment has grown, reaching 6.4 percent last month — its highest level in more than 12 years.

Stevens said the RBA was conscious that interest rate cuts could be less effective than in the past in summoning additional growth in demand.

“A decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy,” he said.

But he added: “Our judgement is that it still has some ability to assist the transition the economy is making, and we regarded it as appropriate to provide that support.”

Stevens said the bank’s revised assessment of sub-trend growth for longer, a higher peak in the unemployment rate, and slightly lower inflation warranted last week’s 25 basis point interest rate cut, its first move in 18 months.

He said the RBA board considered the impact that lower interest rates, which flow through to reduced mortgage payments, could have on an already booming housing market.

But he said excluding Sydney, the rise for Australian housing as a whole over the past year was about five percent.

“That is a healthy pace but not alarming, and some cities have seen price falls,” he said.

“Developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds.”

Asked why the bank cut rates after it had last year flagged a period of stability, Stevens said the evidence had previously been that confidence was improving and non-mining activity firming.

But he said in the second half of 2014 these expectations faded, not disastrously, but enough to indicate that a hoped-for pick-up in activity would not eventuate.

ANZ economists said the governor’s comments left it comfortable with its view that he will cut rates again at the board’s next monthly meeting in March.