Nanny RBA on alert

One reason the Reserve Bank of Australia is hesitant to reduce the cash rate at present is that businesses and households might take a liking to the lower rates and borrow money

In a speech to a business forum in Townsville yesterday Glenn Stevens, governor of the RBA, said "It would be counterproductive if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates.

"This is," Stevens said, "a reason for care, both by the Reserve Bank and private lenders, and I note that lenders are being a bit more conservative on non-price loan conditions for households."

One context to Stevens' remarks was his assessment of the economic outlook for Australia, and in turn followed a review of the impact on production of exports, of the credit shocks of 2007 and 2008 and varied degrees of fiscal stimulus applied around the world.

Speaking narrowly of the outlook in Australia, Steven said, "Our expectation remains that the economy will be well placed for expansion towards the end of this year.

"Initially it will be fairly gradual, in part because of the global factors to which I referred earlier. If so, the degree of spare capacity in the economy will tend to be increasing for a while, and inflation will most likely continue to decline for some time."

He reiterated that "some scope remains to ease monetary policy further, if that were to be helpful to securing a durable upswing."

Choosing to emphasise the word "durable" Stevens said "it is the intention of current monetary policy settings to lower debt-servicing costs, assist efforts to reduce leverage and support
demand."

However, as noted, the RBA is wary, for now, of generating increased debt that a lower interest rate regime might bring.