RBA Cuts Rates on 2nd October But Still Has Ammunition Left
Reserve Bank governor Glenn Stevens says Australia has room to adjust interest rates in response to a global slowdown.
“On monetary policy, we have ammunition,” Mr Stevens said at a seminar at the International Monetary Fund’s annual meeting in Tokyo over the weekend. “Unusually for an advanced country, we actually have materially positive interest rates, so if needed we have scope to move there as long as inflation is okay, which at present it seems to be.”
The RBA has “maximum flexibility” to reduce the key rate if needed as the government returns Australia’s finances to surplus, Treasurer Wayne Swan said yesterday.
Mr Stevens has adopted a gloomier outlook in the past month, ending a three-meeting pause when he lowered the benchmark rate to 3.25 percent on October 2, in a reversal from a June speech when he said he felt the need to do some “cheerleading” on the economy to rebut vocal pessimists.
Prices for Australia’s key commodity exports fell to a more than two-year low in August as Europe’s fiscal crisis weighed on global growth.
Traders are pricing in a near certainty the RBA will reduce the key rate again next month, swaps data compiled by Bloomberg show. That would match the 50-year low of 3 per cent at the height of the 2008-2009 global financial crisis.
The Australian dollar has dropped 2.2 per cent against the US currency in the past month, the biggest decline among the Group of 10.
Mr Stevens noted that Australia’s banking system is profitable and well-capitalized, and the nation’s finances are strong.
“The government’s in deficit right now but looking to be in surplus before long and have very little debt,” he said. “I think we go into a global slowdown in reasonable shape.”
Mr Swan and Prime Minister Julia Gillard have pledged to return the federal budget to surplus in the 12 months to June 30, ending four years of deficits. The task has become more challenging as weaker commodity prices squeeze government revenue and a darkening global outlook saps confidence.
“These headwinds mean we’ll have to find some substantial savings to return the budget to surplus,” Mr Swan said in yesterday’s statement. “A surplus is our best defense in uncertain times for the global economy and shows we are committed to responsible budget management.”