15 Oct 2009

RBA says interest rates are ‘normalising’

Reserve Bank of Australia (RBA) governor Glenn Stevens has defended last week’s interest rate hike, saying the recovering economy stood to benefit from “a more normal” rate.

Speaking at a breakfast function held in Perth on Thursday, Stevens said that barring another serious international setback, the Australian economy was likely to continue on a path of gradual expansion during 2010.

Stevens continued, “Very low interest rate settings were designed for a weaker economy than we are in fact facing. Plainly, the downside risks to which the Board was responding earlier have not materialised.”

Stevens argued that the risk-management approach, which led to the reductions in interest rates, required policy to be recalibrated as circumstances change. He continued, “If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework.”

Stevens admitted that the hike, which lifted the cash rate to 3.25% from 3%, was the first step in a longer term plan to increase rates further in line with improvements in the economy. He added, “None of this is to say that the economy is, at this moment, ‘too strong’. It isn’t.”

Stevens also commented on Australian house prices, describing them as “very high”. However, he argued that in his view the matter was more of a social issue than a monetary policy issue.

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