RBA reminder on rates reversal

RBA governor Glenn Stevens used last night's speech to reiterate one recent theme: the reversal, to a greater or lesser extent, of the fairly deep and fairly rapid cuts in the cash rate late last year, and which loosened monetary policy in Australia.

Reflecting on "applying the lessons" from the country's mild recession of late 2008 and early 2009, he used the speech to reinforce the merit of the approach to monetary and fiscal policy over two decades and attendant shifts in banking regulation and corporate governance standards.

"Even so, it is not too early to think about issues of a medium-term nature.  The key question is:  having had a fairly shallow downturn, how do we make the upswing long and stable, and relatively free of serious imbalances?  

"At least part of the answer is that we will need to re-invest in the same policy discipline, and the same careful private-sector management, that paid dividends in the recent episode.  That means keeping tested frameworks in place, amended as necessary in the light of experience."

One of those "disciplines", Stevens made clear, would be to keep pushing the cash rate up, though he was careful to not leave any fresh clues on timing.

"It means unwinding temporary measures as appropriate.  It means keeping a focus on flexibility.

"And perhaps most of all, it means resisting the temptation to assume prosperity is easily achieved, or easily managed."

Stevens also used the speech to suggest that in any prolonged upswing Australia could expect to have to manage a current account deficit of more than the one that has ranged between four per cent and five per cent of GDP over the last 20 years.

He was pretty sanguine about this and suggested other policy makers may be as well. For one thing, he anticipated that, if correct in anticipating a higher CAD, it would be financed by much stronger equity inflows to finance the continuing investment boom in resources.

But he warned that many foreign investors may not see things that way.