Reserve Bank of Australia

Australia Central Bank More Upbeat, Notes Low Rates


Australia's central bank governor said onFriday there is already a good deal of interest rate stimulus inthe economy, but reiterated the bank could lower rates furtherif needed given a benign inflation outlook.

Reserve Bank of Australia (RBA) Governor Glenn Stevens alsosaid the bank has taken into consideration a stubbornly stronglocal dollar when setting policy.

"It is not that interest rates are seeking a particularexchange rate response, but they are being set with arecognition of the exchange rate's effect on the economy," hetold lawmakers in his twice-yearly parliamentary testimony inCanberra.

"Overall, there is a good deal of interest rate stimulus inthe pipeline. At its meeting earlier this month the board judgedthat it was sensible to allow it time to do its work. The boardbelieved that the inflation outlook, at least as we assess it atpresent, would provide scope to ease further, should that benecessary to support demand."

(Read More: Australia Leaves Interest Rates Unchanged at 3%)

The Australian dollar jumped about half a U.S. centto $1.0309 on Stevens's comments. The stock markets also got a boost, advancing 1.3 percent on Friday, even as other regional markets traded lower.

Having already slashed 175 basis points from its cash rateto a record low 3.0 percent in the past 15 months, the RBA hasadopted a wait-and-see stance but with an easing bias.

The RBA is hoping to see non-mining investment pick up intime to fill any void left when resource spending crests laterthis year.

"Looking ahead, it appears that the peak in the level ofresource sector investment is now close. It is a very high peak,but we do not think that there will be a rapid decline in thenear term after the peak," Stevens said.

"However, it seems pretty clear that this type of investmentwill not be adding to demand for much longer."

Investment spending by businesses in other sectors has beensubdued in comparison. Stevens said there are good reasons toexpect it will strengthen in time but that is unlikely to happenin the very near term.

In particular, Stevens said housing investment should pickup given the low interest rate environment, strong populationgrowth and signs that housing prices are rising.

The RBA recently trimmed its growth and inflation forecasts,expecting a below-potential growth rate of around 2.5 percentover 2013, and underlying inflation to be well contained in its2-3 percent target band.

(Read More: What Aussie Earnings Season Says About the Economy)

Investors suspect rates might be cut further given softnessin parts of the domestic economy, especially those exposed toforeign competition and the high local dollar.

Debt markets are giving a one-in-four chance of a move atthe RBA's March 5 board meeting and have fully factored in thechance of a quarter-point easing over the next 12 months .

Stevens also sounded more upbeat about the global economy,noting the slowdown in China, Australia's single biggest exportmarket, had come to an end.

"The medium-term outlook for China is for a less hectic paceof growth than we saw on average over the past decade," he said,but added the greater absolute size of the Chinese economymeant that even less rapid growth was global significant andimportant to Australia.