Bloomberg News

Stevens Praises Australian Economy, Warns on Asset Bubbles

June 08, 2012

Reserve Bank of Australia Governor Glenn Stevens

Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Brendon Thorne/Bloomberg

Reserve Bank of Australia Governor Glenn Stevens expressed optimism about the nation’s economy and cautioned against monetary policy settings that could reignite asset bubbles, the risk of which he said was low.

“The intended effect of recent policy actions is certainly not to pump up speculative demand for assets,” Stevens said in the text of a speech today in the southern city of Adelaide. “Our judgment is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months.”

Stevens’s speech, titled “The Glass Half Full,” urged Australians to embrace more subdued spending and borrowing, and steadier asset prices, as a path to sustainable economic expansion and wealth. Employment growth this year and a gross domestic product report showing the economy grew 1.3 percent last quarter, more than twice the level forecast, underscore the nation’s resource-fueled strength.

“While there are clearly multiple speeds, the total speed seems to have been one of reasonable growth and low unemployment,” Stevens said.

‘Quite Respectable’

Annual growth of more than 4 percent “includes the recovery from the effects of flooding a year ago, so the underlying pace of growth is probably not quite that fast, but it is quite respectable -- something close to trend,” he said.

The RBA cut rates by 50 basis points late last year and a further 75 points in the past two meetings as inflation remained contained and the savings rate stayed above 9 percent. At 3.5 percent, the overnight cash rate target is still the highest among major developed economies.

“Monetary policy has been cognizant of the changed habits of households and the process of balance-sheet strengthening, and has been set accordingly,” Stevens said today. “The reduction in interest rates over the past eight months or so - -125 basis points on the cash rate and something less than that, but still quite a significant fall, in the structure of intermediaries’ lending rates -- will speed up, at the margin, the process of deleveraging for those who need or want to undertake it.”

Mortgage Rates

Australia & New Zealand Banking Group Ltd. (ANZ) said today it is passing on the RBA’s quarter-point reduction in full. The nation’s four biggest banks have been trying to guard margins against further erosion from elevated wholesale funding costs, by passing through less of the central bank’s rate reductions to mortgage holders.

The RBA is also aiming to shore up demand as the outlook in Europe and China deteriorates. China, Australia’s biggest trading partner, cut borrowing costs yesterday for the first time since 2008 and loosened controls on banks’ lending and deposit rates, stepping up efforts to combat a deepening slowdown as Europe’s debt crisis threatens global growth.

Australia is experiencing a two-speed economy -- a phrase the RBA uses to distinguish resource-rich regions in the north and west that are powering growth and hiring workers, from struggling tourism, manufacturing and retail industries across the south and east.

Stevens, in his address, sought to reconcile the divergence between Australia’s weak consumer sentiment and disquiet among households, with one of the fastest-growing economies and best performing labor markets among major developed nations.

Multi-Speed Growth

“The multi-speed economy is not just about the mining sector squeezing other sectors by drawing away labor and capital and pushing up the exchange rate,” Stevens said. “It is doing that, but slower growth in sectors that had earlier done well from unusually strong gains in household spending would have been occurring anyway, even if the mining boom had never come along.”

Australian consumer confidence stagnated in May near the lowest level this year as concern about the global economy countered the central bank’s 50 basis point rate cut May 1. The sentiment index for May rose 0.8 percent to 95.3, a Westpac Banking Corp. (WBC) and Melbourne Institute survey taken May 7-11 of 1,200 consumers showed May 16. From a year earlier, confidence was down 8.3 percent.

Building Confidence

“One thing we should not do, in my judgment, is to try to engineer a return to the boom,” Stevens said, referring to conditions before 2007. “Many people say that we need more ‘confidence’ in the economy among both households and businesses. We do, but it has to be the right sort of confidence.

‘‘The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind,’’ he said.

The governor also said the central bank shouldn’t neglect retirees and others who live on income from their savings. ‘‘Popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population -- just over one-third -- who occupy a dwelling they have mortgaged,’’ he said.

Traders are pricing in a 25 basis-point rate reduction at next month’s policy meeting, Bloomberg data based on swaps trading shows.

Responding to audience questions, Stevens said he felt the need to do some ‘‘cheerleading’’ for the economy in response to negative commentary on the nation’s prospects and weak consumer and business confidence. The governor initially declined to comment on the outlook for the cash rate when asked about talk of the benchmark being cut to 2 percent before saying that the market is ‘‘pricing for a disaster in Europe, which might happen, or might not.’’

To contact the reporter on this story: Michael Heath in Sydney at

To contact the editor responsible for this story: Stephanie Phang at

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