RBA’s Stevens: Rate Cut Potential Limited but not ‘useless’

Reserve Bank of Australia Governor Glenn Stevens said Monday that rate cuts were not “useless,” but that their potential had become more limited, and that he was optimistic on China’s economy.  Speaking during a question and answer session in New York following prepared remarks before the American Australian Association, Stevens said: “There’s a tendency for people to say, ‘well, things are still not quite strong enough, just keep cutting,’ and I think you have to ask a few more questions than that and think about the channels through which it will be effective.”

While Stevens said that policy was “still effective” and that the central bank had not reached a position where lowering rates was “completely useless,” he said the potential of the mechanism had become more limited since debt is already high and people have already begun spending more.  The RBA cut interest rates to a record low of 2.25 percent in February, but the central bank surprised many analysts by skipping further moves at its policy meetings in March and April.

Stevens’ comments reiterated the sentiment of the prepared speech, in which he said that the RBA is willing to cut interest rates again if needed, but is cautious about the likely impact on house prices and debt levels.  Stevens said that households were managing their debts well, but that he would feel “uncomfortable” with a “big rise in the debt burden.”