Wednesday , November 13 2019

RBA’s Kent says interest-rate cuts flow to Australia economy


Australia’s back-to-back interest-rate cuts are flowing through the financial system and into the economy, while the falling currency should provide a similar stimulus to sustained declines of previous years, a senior Reserve Bank official said.
“The transmission of monetary policy in Australia to financial conditions is working in the usual way,” Christopher Kent, assistant governor for financial markets, said in Sydney on Tuesday. “In particular, the change in the stance of policy has underpinned the decline in risk-free rates along the yield curve. It has also contributed to a decline in the cost of funding in corporate bond markets, supported equity prices, and lowered the cost of funding for banks.”
Kent also said in his speech to the Finance & Treasury Association that much of the reduction in banks’ funding costs has been passed through to business and household borrowers. The cash rate currently stands at 1%, with traders pricing in another quarter-point cut this year and a further one in 2020.
Kent noted that a spike in commodity prices over the past year had impacted the currency less than in the past, due to expectations that the supply-driven gains were likely to be short-lived. He estimated that, in trade-weighted terms, the Aussie dollar was down about 7% over the past year; it was trading at 67.57 US cents at 10:52 am in Sydney, near the lowest level since 2009.
“Notwithstanding an easier stance of monetary policy globally, the decline in interest rates in Australia has contributed to the depreciation of the Australian dollar,” he added.
“That broad-based easing in financial conditions in Australia will provide some additional support to demand in the period ahead.”
Asked after the address whether the currency would deliver the same impetus to the economy as on previous occasions, given changes in the industrial base, Kent was categorical in his response: “Absolutely.”
“Education and tourism benefit just as much through a depreciation in terms of their competitiveness as any other industries which are no longer so prominent,” he said. “So yes I think it’s going to have about the same sort of effect in terms of the stimulus.”
Kent was also asked whether the central bank’s focus was still inflation or perhaps unemployment or even under-employment now. He reiterated the bank’s line that there was more spare capacity in the economy than had been anticipated, as strong hiring had been met by a “substantial increase” in the participation rate.
“We’re certainly not unemployment rate targeters, we still are inflation targeters,” he said. “But it’s a dual mandate, we care about inflation, we care about full employment. We care about the general welfare of the populace.”

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