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Interest rates may stay low for years: RBA

Interest rates may stay low for years: RBA
November 19, 2014 Oven

Reserve Bank of Australia governor Glenn Stevens indicated that interest rates may need to stay low for years because of the weak economy but warned this would only be possible if property prices are kept in check.
In a speech that suggests the central bank is moderating its outlook for 2015, Mr Stevens suggested faltering jobs and wages growth meant it would be “a couple of years” before inflation triggered rate hikes.
That meant it was likely monetary policy would stay stimulatory “for some time yet”, he said.
The remarks coincide with fresh signs the high currency is creating major headaches for the central bank, which said in the minutes of its November board meeting, published Tuesday, that the dollar was still too high given collapsing commodity prices.

While Mr Stevens indicated it was unlikely Australia was in a “bubble”, he said the global financial crisis meant it would be “surely imprudent not to question the comfortable assumption that it is all entirely benign”.Rises across Sydney and Melbourne , with broader prices gaining faster than incomes “by a noticeable margin”, and double-digit growth in investor lending meant it was right to question whether “some people might be starting to get just a little overexcited”, he said.The governor pointedly noted that for official rates to stay low it would be “helpful if pockets of potential over-exuberance don’t get too carried away”.He described looming plans by bank regulators to curb lending to property investors – which are often dubbed “macroprudential measures” – as a way of prolonging the current construction boom, which the Reserve Bank is relying on to take over from sputtering resources investment.“A high level of construction, maintained for a longer period of time, is vastly preferable to a very sharp boom and bust cycle,” he said.“[The] alternative outcome might give us a higher peak in the near term, but then a slump in the housing sector at a time when the fall in mining investment is still occurring. “The governor’s speech, titled ­Economics Possibilities, is his first in more than two-and-a-half months to focus largely on the economy and adds to a growing debate over whether the longest period of monetary policy stimulus since the 1990s will be enough to offset the end of the mining boom and falling terms of trade.

Japan’s Aussie Spending Spree

Significantly, bank minutes from its latest board meeting honed in on the prospect of an escalation in official Japanese money printing for adding to upward pressure on the dollar, which is hurting trade-exposed sectors and exacerbating the impact of falling global prices for iron ore and coal.Propelled by a surge in Bank of Japan quantitative easing and the Reserve Bank of Australia’s higher relative interest rate, investors in Japan bought $21.7 billion of Australian assets in the 12 months ended September 30, the fastest pace in nearly four years.“Such flows could hold the Australian dollar at a higher level than economic fundamentals would imply,” the central bank members said.The RBA is frustrated by the dollar’s stubborn strength despite recent declines against the US currency. In trade-weighted terms the dollar is higher than where it was in January, when iron ore was 75 per cent above Tuesday’s $US75.10 a tonne spot price.The Reserve Bank has almost no option but to keep the official cash rate at 2.5 per cent well into next year, potentially risking an investor-driven housing boom and bust.

The Australian Financial Review